How to Calculate the P/E Ratio (With Example)
Short answer. Divide the current share price by earnings per share (EPS). A stock trading at $50 with EPS of $2.50 has a P/E of 20, meaning investors pay $20 for each $1 of annual earnings. Use trailing EPS for a trailing P/E and expected EPS for a forward P/E.
The formula
P/E = Share price / Earnings per share (EPS)
Step by step
- Find the share price. Use the current market price of one share.
- Find EPS. Take net income minus preferred dividends, divided by the weighted average shares outstanding (see earnings per share). Use the last four quarters for trailing P/E or analyst estimates for forward P/E.
- Divide. Share price divided by EPS gives the P/E multiple.
- Compare sensibly. Compare against the company’s own history and against peers in the same industry, not against the whole market.
Worked example
A company priced at $50 per share
- Net income $100 million, no preferred dividends, 40 million shares: EPS = 100 / 40 = $2.50.
- P/E = 50 / 2.50 = 20x.
- If next year’s expected EPS is $3.125, forward P/E = 50 / 3.125 = 16x.
Common mistakes
- Using negative EPS: a loss-making company has no meaningful P/E.
- Comparing across industries: software and utilities trade on very different multiples.
- Ignoring one-offs: a gain from selling a business can distort trailing EPS.
Frequently asked questions
What is a good P/E ratio?
There is no universal number. Compare with the company’s history and its industry peers; a lower P/E is not automatically cheaper if growth is weaker.
What is the difference between trailing and forward P/E?
Trailing P/E uses reported earnings of the past 12 months; forward P/E uses estimated future earnings and so depends on forecasts.
Can I calculate P/E from market cap?
Yes: market capitalization divided by total net income gives the same ratio as price divided by EPS.
General education, not personal financial advice. Example figures are illustrative.