P/E
Price-to-Earnings · P/E Ratio
How many dollars (or crowns) an investor pays for each dollar of the company's annual earnings.
What it is
P/E = Market Price per Share / EPS (Earnings per Share)
Or equivalently: P/E = Market Capitalization / Net Income
If P/E = 25, you are paying 25× the company's annual earnings. In other words — if we "froze" earnings at today's level, it would take 25 years to "pay back" your investment from earnings alone.
Trailing P/E = current price / historical EPS Forward P/E = current price / estimated future EPS
Why track it
P/E allows quick comparison of a stock's "expensiveness" — historically, against the sector, and against peers. A low P/E may signal undervaluation or business problems. A high P/E may signal overvaluation or strong growth expectations.
P/E is imperfect, however — it ignores debt, CAPEX, and cash flow. Supplement it with P/FCF and EV/EBITDA.
Real-world example
Microsoft (April 2026): Trailing P/E ~23×, historical average ~33×. The discount to history is largely explained by structurally higher risk-free rates (4.4% vs. historically 1–2%).
Watch out for
P/E is worthless for companies with negative earnings (growth startups). Do not compare P/E across different sectors without context — a manufacturing firm at P/E 10× and a SaaS at P/E 40× may both be fairly valued.
“Price is what you pay. Value is what you get.”