What is the P/E ratio?

P/E is the share price divided by earnings per share — or, equivalently, the company's total market value divided by its net income. WylthIQ uses the second form, with net income from the latest annual report and market value from the latest share price.

A P/E of 20 means the market values the company at twenty times one year's profit. Its inverse, earnings divided by price, is the earnings yield: a P/E of 20 is an earnings yield of 5%.

A trailing P/E uses profits already reported. A forward P/E uses estimates of next year's profit, which can turn out to be wrong. WylthIQ shows only the trailing figure, because it rests on audited numbers.

None of these can be read from the number alone, which is why a P/E means little without a comparison: the company's own history, or similar companies in the same industry.

• Expected growth: the market pays more for profits it expects to grow.
• Risk: uncertain or cyclical profits usually command a lower multiple.
• The point in a cycle: a P/E looks low at the top of a cycle, when earnings are unusually high, and high at the bottom.
• Accounting: one-off gains inflate earnings and shrink the P/E; one-off charges do the opposite.

A company that lost money has no meaningful P/E, and WylthIQ shows none rather than a negative figure. A company with barely positive profit can show a P/E in the hundreds, which says more about the tiny profit than about the price.

Because net income is an accounting measure, price to free cash flow makes a useful cross-check. A company whose cash flow is much weaker than its profit will look less expensive on P/E than on cash.