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P/E ratio (price-to-earnings)
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Share price divided by earnings per share. Shows how many years it would take to earn back the purchase price through profits. Low P/E = cheap, high P/E = expensive.
The P/E ratio (price-to-earnings ratio, German KGV) is the most widely used metric for valuing shares. It shows how expensive a share is in relation to its earnings.
Calculation: share price ÷ earnings per share. A share costs €80 and the company makes €4 profit per share: P/E = 80 ÷ 4 = 20.
Interpretation:
• P/E under 12: potentially undervalued ("cheap")
• P/E 12–20: fairly valued
• P/E over 25: potentially overvalued ("expensive")
Caution: a low P/E isn't automatically a bargain – sometimes companies are cheap for a good reason (falling profits, problems). And a high P/E can be justified for fast-growing companies (tech sector).
Did you know? The S&P 500's average P/E has historically been about 16. Currently it is above 25 – so by historical standards the market is expensive.
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