P/E Ratio
Definition
The price-to-earnings ratio is share price divided by earnings per share — equivalently, equity value divided by net income. It measures how much investors pay per dollar of current (or forward) earnings and is the most widely quoted equity multiple.
P/E is a LEVERED multiple: net income is after interest, so both numerator (equity value) and denominator (earnings to equity holders) belong to shareholders — a consistent pairing. Differences in leverage, tax rates, and non-recurring items distort P/E comparisons, which is why banking work leans on EV/EBITDA for operational comparisons.
Variants include trailing P/E (LTM EPS) and forward P/E (consensus next-twelve-month or next-fiscal-year EPS). High P/E generally reflects higher expected growth and/or lower risk; the PEG ratio adjusts for growth.
Why interviewers ask
"Why can P/E be misleading?" (leverage, one-time items, differing tax rates, low or negative earnings) and "why does Company A trade at a higher P/E?" are standard. The core trap is pairing errors — a candidate who proposes EV/Net Income or Price/EBITDA fails the consistency test.
Related terms
Interviews don't test definitions — they test recall under pressure.
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