Price to Earnings Ratio Calculator
Calculate the P/E ratio to assess stock valuation relative to earnings.
What this calculator does
The price-to-earnings ratio divides the share price by earnings per share. It is the most widely quoted valuation measure in equity investing because it turns a share price, which means nothing on its own, into a multiple you can compare across companies and across time.
An 800p share is not expensive and a 30p share is not cheap. What matters is what each one buys in earnings. The P/E answers that in a single number, and its reciprocal — the earnings yield — expresses the same relationship as a percentage, which many investors find easier to reason about.
When to use it
P/E is most useful comparing companies in the same sector, where accounting conventions and business models line up. Comparing a housebuilder's multiple to a pharmaceutical company's tells you very little; comparing two housebuilders tells you something worth acting on.
It also works well against a company's own trading history. A business that spent a decade between 10 and 15 times earnings and now sits at 20 has been rerated by the market, and asking what changed is a more productive question than arguing about whether 20 is objectively expensive.
Understanding the inputs
Enter the current share price and earnings per share. Watch the units — UK share prices are usually quoted in pence while EPS is sometimes reported in pence and sometimes in pounds. Mixing the two produces a ratio out by a factor of a hundred, which is the most common error here.
Decide which EPS you are using: basic or diluted, statutory or adjusted, trailing or forecast. Diluted statutory trailing EPS is the conservative choice. UK companies frequently highlight an adjusted figure excluding exceptional items, and it is nearly always the flattering one.
How is this calculated?
P/E Ratio = Stock Price / Earnings Per Share (EPS).
A worked example
A share trades at 842p with trailing diluted earnings per share of 61p. The P/E is 13.8, so you are paying £13.80 for each pound of last year's profit. Inverted, that is an earnings yield of 7.2 percent.
Compare that with a 10-year gilt yielding, say, 4.3 percent. The share offers a substantially higher earnings yield, though not all of it reaches you as cash. If the company pays out half its earnings, the dividend yield is roughly 3.6 percent, with the balance retained to fund growth or reduce debt.
Limitations and assumptions
P/E ignores the balance sheet completely. Two companies with the same earnings and the same multiple can carry entirely different levels of debt, which is why enterprise value measures exist. It is also unreliable for cyclical businesses — miners and housebuilders look cheapest at the top of the cycle and dearest at the bottom.
Earnings are an accounting output shaped by policy choices, and past valuation levels do not predict future returns. Nothing here is investment advice or a personal recommendation. Treat P/E as one input alongside cash generation, debt, and a considered view of the business.
Common Questions
- What does the P/E ratio tell me?
- It is the price you pay for each pound of the company's annual earnings. A P/E of 14 means the market charges fourteen pounds for a pound of profit, or that the company would take fourteen years to earn back your purchase price at current profitability. It is a price tag, not a judgement.
- What is a good P/E ratio?
- No universal figure exists. The FTSE 100 has typically traded at a lower multiple than the S&P 500, often in the low teens, reflecting its weighting towards banks, energy, and mining rather than technology. A P/E only means something against the company's own history, its sector, and its growth rate.
- Why does the UK market trade on a lower P/E than the US?
- Largely composition. The FTSE is heavy in banks, oil and gas, miners, and tobacco — mature, cyclical, high-yielding sectors that have always commanded lower multiples. The US index is dominated by technology companies with higher growth expectations. The discount is partly structural rather than purely a valuation opportunity.
- What is the difference between trailing and forward P/E?
- Trailing uses the last twelve months of reported earnings, which is fact. Forward uses broker estimates for the coming year, which is opinion. Forward P/E is nearly always lower because analysts assume growth, and it is only as good as forecasts that have a well-documented tendency towards optimism.
- What is the earnings yield?
- The P/E turned upside down — earnings per share divided by price, as a percentage. A P/E of 12.5 is an earnings yield of 8 percent. It is useful because it puts shares on the same footing as gilt yields, letting you compare what a business earns against what government debt pays.
- How does P/E relate to dividend yield?
- Through the payout ratio. Dividend yield equals the earnings yield multiplied by the proportion of earnings paid out. A UK share on a P/E of 12 with a 60 percent payout ratio yields 5 percent. If the yield looks high relative to earnings, check whether the dividend is actually covered.
- Can earnings be manipulated?
- They can be shaped, which is enough to distort the ratio. Exceptional items, changes in depreciation policy, and disposal gains all move reported EPS. Buybacks reduce share count and lift EPS with no operational improvement. Read the cash flow statement alongside the earnings before trusting any P/E.
- What is the CAPE ratio?
- Cyclically adjusted price to earnings, developed by Robert Shiller — price divided by the average of ten years of inflation-adjusted earnings. Smoothing a decade removes distortion from recession-year earnings collapses. It is a poor short-term timing tool but a reasonable guide to long-run expected returns from a market.
- Does a low P/E mean a share is cheap?
- Not necessarily. Many UK shares have traded on single-digit multiples for years because the market correctly judged their earnings were in structural decline. That is the value trap. A low P/E tells you the market has low expectations; the work is deciding whether those expectations are too low.
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