The simple version
P/E compares a company's share price with the profit it earns per share.
Example
If a share costs £30 and the company earns £2 per share each year, its P/E ratio is 15.
Real-life examples
What this can look like in everyday life
Paying for expectations
Two companies may each earn £2 per share. If one share costs £20 and the other £60, investors are paying much more for the second company—often because they expect faster future growth.
A cheap-looking trap
A P/E of 6 may look cheap, but not if profits are about to collapse. It is like a heavily discounted phone with a serious fault: the low price may have a reason.
Why this matters
- It can help compare how highly investors value different companies.
- A high P/E can indicate strong expectations for future growth.
- A low P/E can sometimes indicate lower expectations or greater perceived risk.
What can go wrong?
- A low P/E does not automatically mean a stock is cheap.
- A high P/E does not automatically mean a stock is overpriced.
- P/E is less useful for companies with little or no profit.
Remember this
P/E tells you how much investors are paying relative to a company's earnings. It is useful context, not a verdict.