Price-to-earnings (P/E) ratio, explained
The P/E ratio is the most-quoted number in investing — a quick gauge of how expensive a stock is relative to its profits. Here's the formula, a worked example, and what a ‘good’ P/E actually depends on.
What it measures
The price-to-earnings ratio compares a company's share price to its profit per share. In plain terms: how much you're paying for each £1 of the company's annual earnings — or, flipped around, roughly how many years of today's profit you're paying to own the business.
The formula
Worked example
A share trades at £50 and the company earns £2.50 per share:
A P/E of 20 means you're paying £20 for every £1 of annual profit — about 20 years of current earnings to buy the business outright.
Trailing vs forward P/E
Trailing P/E uses the last 12 months of actual earnings. Forward P/E uses analysts' forecast for the next year. Trailing is fact; forward is an estimate — useful, but only as good as the forecast.
What's a good P/E ratio?
There's no universal number — it depends on growth and sector:
| P/E | Broad read |
|---|---|
| Under 10 | Cheap — or the market expects trouble |
| 10 – 20 | Typical for an established, steady business |
| Above 25 | The market is pricing in strong growth |
Fast-growing tech routinely trades on high P/Es because investors expect earnings to catch up; utilities and banks trade low because growth is slow. A high P/E isn't automatically "expensive" and a low one isn't automatically "cheap" — always compare against the company's sector and its own history.
The limitations
P/E breaks down when earnings are distorted by one-off items, and it's meaningless for a loss-making company (no positive earnings to divide by). It also ignores debt and growth rates. Treat it as a fast first read, not a verdict — which is why Oak Growth uses P/E versus the sector median as just one input (35% weight) in its relative-valuation score.
Put this into practice — open the screener →