Price-to-Earnings Ratio (P/E)
Definition
A valuation ratio comparing a company's share price to its earnings per share. The P/E ratio indicates how much investors are willing to pay for each pound of earnings and is influenced by growth expectations, risk profile, and the strength of intangible assets.
Complementary Terms
Concepts that frequently appear alongside Price-to-Earnings Ratio (P/E) in practice.
A valuation ratio comparing a company's market capitalisation to its book value. A P/B ratio significantly above 1.0 indicates that the market recognises substantial value beyond what is recorded on the balance sheet, typically reflecting intangible assets.
A measure of how much capital is required to generate a unit of revenue, calculated as total assets divided by total revenue. Companies with high intangible asset bases may report misleadingly low capital intensity because many intangible investments are expensed rather than capitalised on the balance sheet.
The ratio of earnings before interest and taxes (EBIT) to interest expense, measuring a company's ability to meet its interest obligations from operating profits. A higher ratio indicates greater financial headroom and lower default risk.
A financial leverage ratio calculated by dividing total debt by total shareholders' equity, indicating the relative proportion of debt and equity financing in a company's capital structure. A higher ratio indicates greater financial leverage and potentially higher financial risk, while a lower ratio suggests more conservative financing.
The ratio of a loan amount to the appraised value of the underlying collateral, expressed as a percentage. LTV is a primary risk metric used by lenders to assess the adequacy of collateral coverage — a lower LTV indicates greater equity cushion and lower credit risk.
A financial metric measuring the proportion of debt in a company's capital structure relative to its earnings, equity, or assets. The most common leverage ratios in corporate finance and lending include net debt to EBITDA, debt to equity, and debt to total assets.
The ratio of net operating income to total debt service obligations (principal plus interest payments) over a given period, measuring a borrower's ability to service its debt from operating cash flow. A DSCR above 1.0x indicates sufficient cash flow to meet debt payments, while lenders typically require a minimum DSCR of 1.2x to 1.5x as a loan covenant.
A ratio used to estimate the value of a company by comparing its market value or enterprise value to a financial metric such as revenue, EBITDA, or earnings. Higher multiples typically reflect stronger growth prospects, margin quality, and intangible asset positions.
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