The formula
How to calculate p/E ratio
The price/earnings ratio is what the market is paying for each pound of annual profit. A P/E of 14 means fourteen years of current earnings would repay the share price — a rough, useful way to read what a valuation implies.
Earnings yield, the reciprocal, is often the more intuitive form. It puts a share on the same scale as a bond yield or a savings rate, which makes the comparison between asset classes direct.
What to enter:
- Share price
- Earnings per share
Results appear immediately — there is nothing to submit. Changing a field rewrites the link, so you can share the exact scenario you are looking at.
Worked example
Work through the defaults on this page:
- Share price: 42
- Earnings per share: 3
That gives:
- P/E ratio: 14 ×
- Earnings yield: 7.14 %
- Years of earnings to repay the price: 14 years
Reading the result
A high P/E is a statement about expected growth, not about quality. It only pays off if the growth arrives. Compare against the same company's history and its sector — a 25× software company and a 25× utility are telling you very different things.
Where this goes wrong. Comparing across cycles. A cyclical business looks cheapest at the top, when earnings are peaking, and most expensive at the bottom. For those, a cyclically adjusted ratio using average earnings over ten years is far more informative.
There is no universal figure. Broad developed markets have averaged somewhere in the mid-teens over long periods; below that suggests low expectations, above it suggests high ones. The question worth asking is what growth the price implies and whether it is plausible.
Trailing uses the last twelve months of reported earnings — factual, but backwards-looking. Forward uses analyst estimates for the year ahead, which is more relevant and more often wrong.
The answer it gives you is p/E ratio. With 42 share price and 3 earnings per share, that comes to 14 ×. Change any field and the figure moves with it.