Glossary
P/E ratio: definition
The price-to-earnings ratio divides a share price, or a market cap, by earnings. It tells you how many years of those earnings the price represents, if the earnings continued, which they will not, exactly.
In practice
Trailing P/E uses reported earnings. Forward P/E uses forecasts, which are opinions. Cyclical businesses look cheapest on P/E at the peak of earnings and dearest at the trough, which is the opposite of how a careful buyer often thinks. Accounting choices, one-off gains and different tax rates make cross-company comparisons rough. A low P/E is a question, not a decision.
A worked example
A share at 30 with earnings per share of 1.50 has a trailing P/E of 20. If next year’s earnings fall to 0.75 and the price stays, the forward picture is 40. The ratio moved because the denominator moved.
Related
Sources and review
Last reviewed: 2026-10-13. Next review due 2027-04-13. Status: editorial review of this page, not a live verification of every third-party fee.
Author: WiT Markets Editorial, Editorial desk. The WiT Markets editorial desk writes explanatory pages, comparison context and research notes. It separates sourced facts from items that are not confirmed, and it does not provide personal recommendations.
Reviewed by: WiT Markets Research Review.
Primary and regulatory sources
- U.S. Securities and Exchange Commission — checked 2026-10-13
- Investor.gov — checked 2026-10-13