PE (Price to Earnings)

The PE ratio is a popular valuation measure. It divides the current share price by the latest Earning per Share (EPS).

Think of it as what multiple of earnings (profits) you are being asked to pay for the shares – between 10 and 25 is best. Beware that very low PEs (i.e. below 5) can be a sign of financial distress.

Example: if a company’s PE is 10 then it means we will be paying 10 times and annual earnings (profit) of this company to purchase the entire company. In 10 years’ time we have paid back the cost of the business. This is why a PE of 56 is not acceptable as the price for the business is too high.