Price–earnings ratio
The price–earnings ratio compares a share’s market price with earnings per share on a consistent basis. It is commonly used to compare market valuations and earnings expectations, but interpretation depends on the earnings period, accounting basis and prospects.
Worked example
A share price of 12 and earnings per share of 0.60 give a price–earnings ratio of 12 ÷ 0.60 = 20 times.
Common mistake
A high or low ratio alone does not establish that a share is overvalued or undervalued, and a negative EPS needs careful interpretation.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AAA (INT) | Supporting | September 2026–June 2027 |