Price-to-earnings ratio

The price-to-earnings ratio divides the share price by the last twelve months of earnings per share. A P/E of 20 means the market values the company at twenty years of its current profit.

A high P/E usually means investors expect profits to grow; a low one means they expect them to stall or fall, or that the business carries more risk. On its own it says nothing about which view is right.

Where it misleads. Earnings include one-off gains, write-downs and tax items, so a single year can make a company look very cheap or very expensive. Loss-making companies have no meaningful P/E at all. Compare it with price to free cash flow, which follows the cash instead, and with the company's own history.