The price-to-earnings ratio, also known as the P/E ratio, shows how much investors are willing to pay for one euro of a company’s earnings. It is calculated by dividing the share price by the earnings per share. It is a commonly used measure to assess whether a share appears expensive or inexpensive.

The P/E ratio indicates how high investors’ expectations are regarding future earnings.

A high price-to-earnings ratio means that investors are willing to pay relatively much for the current earnings, often because they expect strong growth. A low P/E ratio may indicate that a share is inexpensive, but it can also point to lower growth expectations or higher risks.

The P/E ratio should therefore always be considered in combination with growth prospects and the sector in which the company operates. In fast-growing sectors, ratios are often higher than in stable, slowly growing industries.

Short example:

Suppose a share costs €50 and the company earns €5 per share. The price-to-earnings ratio is €50 divided by €5, which equals 10.

If another company also earns €5 per share but the share price is €100, then the P/E ratio is 20. In that case, investors pay twice as much for the same earnings, usually because they expect that this company will grow faster in the future.

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