What Is a P/E Ratio? How to Tell If a Share Is Cheap or Expensive

This guide explains what a P/E ratio is, how to calculate it, what a "high" or "low" number really tells you, and how everyday Australian investors use it as part of their research. We'll keep it plain English, with examples in dollars and cents.

What is a P/E ratio?

The price-to-earnings ratio — P/E for short — tells you how much you're paying for each dollar of a company's annual profit. It compares a company's current share price to the profit it earns per share.

Put simply: a P/E ratio of 15 means investors are paying $15 for every $1 of yearly earnings the company generates. It's a quick way to gauge whether a share looks cheap or expensive relative to how much the business actually earns.

How to calculate a P/E ratio

The formula is straightforward:

P/E ratio = Share price ÷ Earnings per share (EPS)

Let's run a hypothetical example in Australian dollars.

Imagine a company's shares trade at $30. Over the past 12 months, the business earned $2.00 per share. Its P/E ratio is:

$30 ÷ $2.00 = 15

That means you're paying $15 for every $1 the company earns in a year. As a rough mental shortcut, you can also read a P/E of 15 as "at this rate of profit, it would take about 15 years of earnings to pay back the share price" — handy for intuition, though real businesses rarely earn the same amount every year.

What is EPS (earnings per share)?

Earnings per share is simply a company's net profit divided by the number of shares on issue — the slice of profit attached to each individual share. You'll usually find a company's EPS in its financial results, and most share research tools display the P/E ratio for you so you don't have to calculate it by hand.

If you're new to reading company numbers, our guide to the five fundamentals of investing for Australian investors is a good place to build the basics.

What does a high or low P/E ratio mean?

This is where the P/E ratio gets interesting — and where a lot of beginners trip up. A high number isn't automatically bad, and a low number isn't automatically a bargain.

A high P/E ratio often means the market expects strong future earnings growth. Investors are willing to pay more today for each dollar of current profit because they believe profits will climb. Fast-growing technology and healthcare companies frequently trade on high P/E ratios for exactly this reason. The risk: if that growth doesn't arrive, the share price can fall sharply.

A low P/E ratio can mean a share is genuinely cheap relative to its earnings — or it can be a warning sign that the market expects profits to shrink. A stubbornly low P/E that never recovers is sometimes called a "value trap": it looks cheap, but for a reason.

The key takeaway: the P/E ratio raises a question ("why is this share priced this way?") rather than answering it. It's a starting point for research, not a verdict.

What is a "good" P/E ratio in Australia?

There's no single magic number. A "good" P/E depends entirely on what you're comparing it to. Three useful comparisons:

1. The company's own history — is it higher or lower than its typical range?

2. Its sector peers — compare a bank to other banks, a miner to other miners.

3. The broad market — how does it stack up against the average for Australian shares?

On that last point, the broad Australian share market has generally traded somewhere in the high-teens to mid-20s in recent years, though the exact figure varies depending on which index you use and which data provider you check. For a current reading, Market Index publishes ASX P/E statistics.

Sectors differ a lot, too. As a general illustration, mature, steady businesses such as the big banks have historically traded on lower P/E multiples than fast-growing technology or healthcare companies, where investors pay a premium for expected future growth. That's why comparing a tech company's P/E directly against a bank's tells you very little — you need to compare like with like.

Trailing vs forward P/E (and why two websites show different numbers)

If you've ever seen one site quote a P/E of 18 for a share and another quote 24 for the same company on the same day, you're not imagining it. There are two common versions of the ratio:

• Trailing P/E uses the company's actual earnings over the past 12 months. It's factual and backward-looking.

• Forward (or prospective) P/E uses analysts' forecast earnings for the next 12 months. It's forward-looking — and only as reliable as the forecast.

Beyond that, providers can calculate the "E" differently: basic versus diluted earnings per share, whether one-off items are stripped out, the timing of currency conversions for overseas earnings, and how recently the data was updated. None of these are "wrong" — they're just different methods. The practical lesson: always check which version of the P/E you're reading, and compare apples with apples across companies.

The limits of the P/E ratio

The P/E ratio is popular because it's simple, but simplicity has a cost. Keep these limitations in mind:

• No earnings, no P/E. A company that isn't profitable will show a negative P/E or none at all. The ratio simply doesn't work for loss-making businesses — common with early-stage growth companies.

• Cyclical companies can mislead. For miners and energy producers, earnings rise and fall with commodity prices. A P/E can look deceptively low at the top of the cycle (when profits are peaking) and high at the bottom.

• It ignores debt. Two companies with the same P/E can carry very different levels of borrowing — and very different risk.

• One-off items distort earnings. A asset sale or a write-down can temporarily inflate or deflate profit, throwing the ratio out.

• Trailing figures look backwards. Past profit is not a promise of future profit. Remember that past performance is not a reliable indicator of future returns.

Because of these blind spots, experienced investors treat the P/E as one tool among many — never the whole story. Our explainer on fundamental versus technical analysis puts it in context alongside other research approaches.

How to use the P/E ratio in your own research

Used well, the P/E ratio is a fast, useful filter. A few sensible habits:

• Compare like with like. Same sector, similar size and stage. A growth stock and a mature dividend payer aren't meant to share a P/E.

• Pair it with other measures. The PEG ratio (which divides the P/E by the company's earnings growth rate) tries to put a high P/E in the context of growth. Dividend yield, debt levels and cash flow round out the picture.

• Treat it as a question, not an answer. A surprising P/E is a prompt to dig deeper, not a buy or sell signal on its own.

Before you act on any single number, it's worth running through a broader checklist — our 5 questions to ask before buying a stock is a practical starting point, and for a worked valuation example see how to value CBA shares.

You don't have to crunch these numbers yourself, either. Selfwealth Premium surfaces the P/E ratio alongside other key fundamentals in its stock reports, so you can compare companies at a glance — and new members get 90 days free to try it out.

Frequently asked questions

What does a P/E ratio of 15 mean?

A P/E ratio of 15 means investors are paying $15 for every $1 of the company's annual earnings. Whether that's cheap or expensive depends on the company's growth prospects, its sector and the broader market — 15 might be high for a slow-growing utility but low for a fast-growing tech business.

Is a high or low P/E ratio better?

Neither is automatically better. A high P/E usually reflects expectations of strong future growth, while a low P/E can signal a bargain — or a company the market expects to struggle. The number is a prompt for further research, not a recommendation in itself.

What is a good P/E ratio for ASX shares?

There's no universal "good" number. Compare a company's P/E to its own history, to its industry peers, and to the broad market average (which has generally sat in the high-teens to mid-20s in recent years, depending on the index and data source). A "good" P/E for a bank looks very different from a "good" P/E for a growth stock.

What's the difference between trailing and forward P/E?

Trailing P/E uses the company's actual earnings from the past 12 months. Forward P/E uses analysts' forecast earnings for the next 12 months. Trailing is factual but backward-looking; forward is only as accurate as the forecast behind it.

Why do two websites show different P/E ratios for the same share?

They may be using different versions — trailing versus forward earnings, basic versus diluted EPS, or different treatment of one-off items and currency conversions, plus different update times. Always check which method a source uses before comparing.

Can a company have no P/E ratio?

Yes. A company that isn't making a profit will have a negative P/E or none at all, because the ratio relies on positive earnings. This is common for early-stage or fast-growing companies that are reinvesting rather than turning a profit.