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Valuation

P/E Ratio

Share price divided by earnings per share — the most popular valuation multiple.

Definition

Price-to-Earnings is the price you pay today for $1 of annual earnings. Trailing P/E uses the past 12 months, forward P/E uses analyst consensus for the next 12 months. P/E is intuitive but breaks down for unprofitable companies, is distorted by accounting choices, and ignores capital structure. A high P/E can mean overvaluation or high expected growth — that is why it is usually compared with the PEG ratio and the company's own historical range.

Formula

P/E = Price per Share / EPS

Forward P/E = Price / Consensus EPS_next_12m
Trailing P/E = Price / EPS_last_12m

Worked example

AAPL trades at $190 with trailing EPS of $6.50. Trailing P/E = 190 / 6.50 = 29.2x. The 10-year mean is ~21x, so AAPL is currently trading roughly one standard deviation above its own historical valuation.

How ARIA Analyst uses it

ARIA stores a 30-year P/E history per ticker and z-scores the current value to flag when a stock is statistically expensive or cheap versus its own past.

Related terms

  • PEG Ratio

    P/E ratio normalised by the earnings growth rate — Peter Lynch’s favourite.

  • EV/EBITDA

    Enterprise value divided by EBITDA — a capital-structure-neutral cash earnings multiple.

  • Price-to-Book (P/B)

    Market value of equity divided by accounting book value — classic asset-based metric.

  • Discounted Cash Flow (DCF)

    Intrinsic value of an asset as the present value of its future cash flows.

See P/E Ratio in action on any asset

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