Price to earnings

The price to earnings ratio is the most quoted number in investing and the most casually misused. It says how many years of current profit you are paying for, assuming profit never changes, which it always does.

Forward P/E uses analysts' expected earnings instead of reported ones. It is more relevant and less reliable, since it depends on estimates that are frequently wrong and systematically optimistic.

A share price of $120 and expected earnings per share of $6.

1. 1120 / 6 = 20.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• A high P/E is a claim about growth, not a verdict on value. The question is whether the growth implied is achievable.
• Compare within an industry and against the company's own history. Across industries the comparison is close to meaningless.
• Earnings are the most manipulable input in this ratio, which is why cash-based multiples are worth checking alongside it.

• It breaks entirely for companies with no earnings, which includes most early-stage businesses.
• It ignores debt. Two companies at the same P/E are not equally priced if one is heavily leveraged.
• One-off gains and charges distort trailing earnings in both directions.

Forward P/E carries the largest weight of the four metrics in the scorecard's Valuation category. The basis of the forward earnings estimate is labelled on screen rather than assumed.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.