Price/earnings ratio
It indicates how much the market price represents relative to the selected earnings measure, often expressed as a multiple. Specify whether EPS is historical or forecast and whether the period and share basis are consistent. A high ratio can reflect growth expectations, perceived risk or unusual earnings; it does not by itself prove overvaluation. Negative, very small or volatile earnings can make the multiple difficult to interpret.
Worked example
A share trades at $12 and annual basic EPS is $0.80. The historical P/E ratio is $12 ÷ $0.80 = 15 times.
Common mistake
Dividing the share price by total company profit instead of per-share earnings, or comparing ratios without checking earnings period and accounting differences.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Supporting | September 2026–June 2027 |
