What is considered a good PE ratio?ĭefining a ‘good’ or ‘bad’ PE ratio is difficult. A company with a high trailing PE may be viewed as having a more reliable record than one where the forward PE is in its twenties. Earnings per share can be either ‘trailing’ or ‘forward’, with the former taking into account the earnings from the past few years, and the latter relying on estimates. Companies that are expected to grow more quickly will command a higher price for their earnings. For others, a low PE is preferred, since it suggests expectations are not too high and the company is more likely to outperform earnings forecasts.īuying a stock is essentially buying a portion of that company’s future earnings. A higher PE suggests high expectations for future growth, perhaps because the company is small or is an a rapidly expanding market. But filtering using a PE ratio allows an investor to reduce the choice to a smaller number, removing those based on a particular criterion.įor some investors, a high PE ratio might be deemed attractive. For example, there are hundreds of companies in the two main UK indices alone, and pouring over their financial statements would take hundreds of hours. The advantage of a PE ratio, like many other formulae in investing, is that it allows an investor to compare different companies using one simple calculation. A low PE ratio can arise as a share price falls while earnings remain broadly unchanged.

The share price has risen faster than earnings, on expectations of an improvement in performance A high PE ratio suggests that investors expect a high level of earnings in the future, and that growth will be strong.PE ratio = share price/earnings per share What does a PE ratio tell us? If a company’s EPS is £20, and the share price is £140, then £140/£20 equals seven, suggesting that an investor will be £7 for each £1 of EPS. The PE ratio is calculated by dividing a company’s share price by the earnings per share (EPS) figure. The PE ratio is one of these, and while it is one of the most commonly used, it is also one of the most useful, narrowing down the universe of possible investable choices. The fundamental investor uses a selection of tools to determine whether a share price is overvalued or undervalued. It is also known as the price multiple, or the earnings multiple, and shows how much an investor is prepared to pay for each £1 of a company’s earnings. The price-earnings (PE) ratio measures the current share price of a company relative to its earnings.

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