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What you will learn
- Divide price per share by earnings per share.
- Distinguish a low share price from a low P/E ratio.
- Check the earnings period and handle zero or a loss in the denominator.
A price of SEK 60 can give the same P/E as SEK 120
Company A’s fictional share price is SEK 120 and EPS is SEK 8. Its P/E is 120 ÷ 8 = 15. Company B costs SEK 60 but has EPS of SEK 4, also giving 15. Company C costs SEK 120 with EPS of SEK 6, giving P/E of 20. Price in money terms and price relative to earnings answer different questions.
P/E of 15 means the share price is 15 times the specified earnings per share in this calculation. It does not mean you receive your investment back in exactly 15 years. Earnings can change and are not automatically distributed to the owner.
If the table does not fit, scroll it sideways.
| Company | Share price | EPS | P/E |
|---|---|---|---|
| A | SEK 120 | SEK 8 | 15 |
| B | SEK 60 | SEK 4 | 15 |
| C | SEK 120 | SEK 6 | 20 |
Both price and earnings can change the ratio
If A’s price rises to SEK 160 while the same EPS of SEK 8 is used, P/E becomes 20. If the price instead stays at SEK 120 but EPS for a new full year is SEK 10, the ratio is 12. Record which input changed; a lower ratio does not have to result from a price fall.
You can also check the formula by multiplying P/E by EPS: 15 × 8 = 120. That reproduces our entered price. It is a mathematical check rather than a method that establishes what the share should cost in the market.
Zero, losses and forecasts need different questions
With EPS of zero, you cannot divide the price by EPS. With negative EPS, the arithmetic ratio is negative, but it should not be read as a cheap positive-earnings measure. Data providers may therefore show a blank or specially marked field when a company reports a loss.
Historical EPS and a forecast for next year are different inputs. A forecast is an estimate that may be wrong. Even two historical figures can cover different periods or adjustments. Read the definitions rather than trying to make them comparable by looking only at the size of the numbers.
Read a ratio together with its underlying information
A one-off gain can raise one year’s EPS without the same gain recurring. An unusually weak year can have the opposite effect. The SEC’s introduction therefore connects ratios to reported earnings and other information. Our example makes no assumptions about company growth, debt or future cash flows.
Write a checking question when using the measure: which price, currency, earnings figure and period? If an input is missing, you cannot fully assess the comparison. Continue with the company-search workflow to practise identifying a company and the right information.
Try it yourself
A fictional share costs SEK 90 and EPS for the stated full year is SEK 6. Calculate P/E. If EPS for a new full year is SEK 5 while the price stays unchanged, what is the new ratio?
Show the solution and explanation
P/E is 15 at first and 18 with the new EPS figure.
90 ÷ 6 = 15. Then 90 ÷ 5 = 18. The ratio rose despite the unchanged share price because the stated earnings per share became smaller.
Check your understanding
Is B’s share automatically cheaper than A’s because its price is SEK 60 rather than SEK 120?
No. Both have P/E of 15 in the model. The model also does not say which share is a better investment.
Can you calculate a conventional P/E ratio when EPS is zero?
No. Division by zero is undefined. Read the reported earnings and the data provider’s explanation.
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More lessons on this topic
Ratios and compound growth
Sources and examples
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
