Price to earnings (P/E)

Valuation

Market cap as a multiple of the latest fiscal year's net income.

Formula

P/E = market cap ÷ net income (latest fiscal year, when positive)

Why it matters

The P/E is the common language of valuation: how many dollars you pay for each dollar of current annual profit. Its real content is expectations — a P/E of 30 versus 15 means the market expects roughly twice as much future value from each current earnings dollar, which must come from growth. Flipping it over gives the earnings yield, directly comparable to bond yields. Every multiple is shorthand for a DCF; the P/E is just the most familiar shorthand.

What good looks like

As a rough map: under 12 prices in stagnation or decline, 12–20 is ordinary expectations for a mature business, 20–35 requires solid growth to justify, and above 35 the price depends heavily on years of strong compounding. A low P/E on a deteriorating business is not cheap, and a high P/E on a great one is not necessarily expensive — the multiple is the start of the question, never the answer.

Caveats

We use the latest full fiscal year's net income, not trailing twelve months, so the figure lags for companies whose earnings are moving fast. Net income is accounting-sensitive: one-time gains compress the P/E artificially and charges inflate it. The ratio is undefined for loss-makers. For cyclicals, the P/E is lowest at the earnings peak — precisely the most dangerous time to find it attractive.