P/E is the most common key figure used to see how much you need to pay for a share.
P/E abbreviates Price/'Earnings per share' and determines the multiple of the annual profit for which a share is sold.
P/E = Share Price / Earnings per Share
PE = 10 means that you have to pay 10 times the earnings of one share.
Historically, a P/E typically ranges between 15-30.
Today, many companies have a high P/E as the market expects strong company growth.
Example - Date: 21-02-2021
Evolution Gaming has a share price of SEK 1078 with an Earning per Share of SEK 16.2 (Q4-2021).
PE = (1078/16.2) = 66.5
Things to keep in mind
- A low value is good.
- A high P/E can indicate that the company is overvalued, or that the market expects high growth.
- A high P/E often means that the company has a high risk. The share price can quickly plummet if the company is unable to deliver high growth.
- Negative P/E shows that the company is not profiting. In such instances, a good alternative key figure to look at is the P/S.
- If the company increases the number of shares, earnings per share will fall. This means that the company’s P/E rises.