Price per share divided by the earnings after tax per share.
A Price Earnings Ratio is an extremely popular measure used by investors when appraising quoted company performance and is simply the price per share divided by the earnings after tax per share. It shows how much investors are prepared to pay for each ? of earnings they are entitled to and, with just a cursory glance at the financial press, will quickly show how volatile this number is both between different sectors and within each sector.
One way of interpreting P/E ratios is by considering them as a payback period. In the example above, an investor would need to wait 5.6 years before his investment would be recouped if earnings were maintained at current levels and fully distributed.
|FTSE Company / Sector
Source: Financial Times March 2012
An alternative analysis involves taking the reciprocal of the P/E in order to obtain a rate of return easily comparable with alternative investments; e.g. bank interest rates. Thus, the table also shows rates of return apparently nearly four times higher in electricity than technology. If this seems counter-intuitive, it is and simply highlights the drawback of P/E ratios. What