P/E ratio

The price-to-earnings ratio compares what the market charges for a share with the profit behind it. A P/E of 15 means investors are paying 15 times the company's annual earnings per share. A trailing P/E uses the last twelve months of reported earnings; a forward P/E uses analysts' forecasts for the coming year, which may prove wrong. The inverse of the P/E, earnings divided by price, is the earnings yield, which some investors compare with bond yields. The same ratio can be calculated for a whole index by combining its companies' prices and earnings.

A high P/E usually signals that investors expect strong earnings growth, or see the profits as unusually secure; a low P/E may signal pessimism, low growth or a hidden problem. Neither is automatically good or bad. P/Es are most useful when comparing similar companies, or a company with its own history, since normal levels differ widely between industries. They also break down in some cases: a company with depressed or negative earnings can show a huge or meaningless P/E, and one-off gains can make a share look deceptively cheap.