Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

P/E ratio is an important metric used to assess the relative value of a stock (or sometimes an index or industry). It is calculated as its share price divided by earnings per share (EPS).

# P/E ratio definition

P/E ratio is an important metric used to assess the relative value of a stock (or sometimes an index or industry). It is calculated as its share price divided by earnings per share (EPS).

P/E ratio is also often referred to price to earnings, PE ratio or price-earnings multiple.

## Using P/E ratios

If Lloyds Banking Group’s share price is 100p and its EPS is £0.04 then its P/E is 25 (100/4=25).

By dividing a company’s current share price by its earnings per share, traders are able to assess the level at which shares are trading compared to the profit a company is making. If a company has a high P/E ratio, then those buying its shares are usually anticipating that earnings will increase in the future to justify its valuation. It may also indicate that the company is currently overvalued.

## Types of P/E

P/E ratios are usually calculated using 12-month trailing EPS. It is possible, however, to use projected earnings to create a forward P/E ratio. Many analysts will also create normalised P/E by taking a company’s normalised earnings.

Different industries will have different average P/E ratios, so the definition of a high P/E varies between assets. Growth companies will tend to trade with higher P/E ratios than established blue chip stocks.