P/E: what it is and why low does not mean cheap

P/E (price to earnings) is the ratio of a company's price to its annual profit. It answers one question: how many years of profit the market is willing to pay for this business.

How we calculate it

Capitalisation divided by trailing twelve-month net profit. Forecast earnings are not used: a forecast is not a fact, and putting one into a multiple means passing somebody's opinion off as our figure.

3,70

What a low value means

Two mutually exclusive explanations, and telling them apart is the whole job of an analyst.

The first: the market is wrong and the company really is cheap. That happens.

The second: the market expects profit to fall. The denominator will shrink and the multiple will return to normal — but at a lower price.

When the multiple does not work

With a loss it is undefined — a negative value would be meaningless, and we do not display it.

For cyclical companies it is lowest at the peak of the cycle: profit is at a maximum and the market is already pricing its decline. Buying a "cheap" cyclical security on a low multiple is the classic trap.

What to compare it with

Only with the sector and with the company's own history. Comparing a bank's P/E with a retailer's means nothing.