Term · Valuation
P/E ratio (price-earnings ratio)
In briefThe P/E ratio compares the share price or market capitalisation with earnings per share or the profit attributable to shareholders. For young or cyclical small caps, one-off effects and fluctuating profits distort the metric, so it says little in isolation.
Definition
The P/E ratio relates the share price or market capitalisation to earnings per share, or to the profit attributable to shareholders.
How it is calculated
Formula. P/E = share price ÷ EPS, or market capitalisation ÷ profit attributable to ordinary shareholders.
Why it matters for small caps
For young or cyclical small caps the P/E ratio can be strongly distorted by one-off effects or fluctuating profits and is only of limited use in isolation.
Common misreadings
- With negative EPS the P/E ratio cannot be meaningfully interpreted economically. A low positive P/E can reflect peak earnings, high leverage or structural risks.
In the process
Frequently asked
What is the price-earnings ratio (P/E)?
It shows how much investors are willing to pay per unit of profit. A high P/E often signals high expectations.
How do you calculate the P/E ratio?
You divide the share price by earnings per share, or market capitalisation by attributable profit. It makes sense to look at it across several years.
When is the P/E ratio of little use?
With negative earnings it cannot be interpreted meaningfully in economic terms. A low positive P/E can mask peak years, high leverage or structural risks.
Related terms
Sources
Primary
IFRS Foundation – IAS 33 Earnings per Share
https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/
https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/
Methodology
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.