Price-to-Earnings Ratio (P/E)

The P/E ratio is one of the most widely used measures of how expensive a share is. If a share trades at 60 and the company earned 4 per share over the past year, the P/E ratio is 15. Investors are paying 15 for every 1 of annual earnings.

A high P/E often means investors expect strong future growth, so they are willing to pay more today for current earnings. A low P/E may mean the company is expected to grow slowly, faces risks or is undervalued by the market.

P/E ratios vary a great deal between industries. Fast-growing technology companies often have high P/E ratios, while banks and utilities often have lower ones. Comparing a company's P/E with its peers and its own history is usually more meaningful than looking at the number alone.

The ratio has limitations. It cannot be used meaningfully when earnings are negative, it can be distorted by one-off gains or losses and it ignores debt. Analysts often look at both trailing P/E, based on past earnings, and forward P/E, based on expected earnings.