Price to Earnings (PE)
Definition
PE (or PER: Price to Earnings Ratio) is a valuation ratio of a company's current share price compared to its per-share earnings.
This is an estimates ratio.
Calculation Rules
PE = Last Close Price / Earnings Per Share (e)
PE relates the current share price with the market expectations in terms of Earnings Per Share (EPS). For example, if current share price is US$ 75 and expected EPS for 2021 is US$ 12, PE for 2021 is 6.25.
PE widely varies from one company to another. Nevertheless, companies operating in the same business tend to have closer ratios, particularly when they show similar growth expectations.
When comparing companies using their PE, it is also necessary to compare their Trading Multiples (particularly EV/EBITDA), because unlike PE, they take into account and level up for each company's capital structure: the PE ratio relates to the equity value whereas Trading Multiples relates to the Enterprise Value.