The price/earnings ratio (P/E) is a valuation standard for determining whether a share is undervalued or overvalued at a particular time. The higher the price/earnings ratio, the more the share could be overvalued.

This ratio is calculated by dividing the current share price by the earnings per share. The current profit or the expected profit can be used for this purpose. The price/earnings ratio indicates how much investors are prepared to pay for each euro of profit. The higher (or lower) the price/earnings ratio, the more (or less) the share will be overvalued.

It is important, as an investor, not to base a purchase solely on this key figure, as profit is an accounting concept and can be distorted by all kinds of operations. Price/earnings ratios should therefore only be compared within a certain sector. Some sectors are characterised by, for example, a rather low price/earnings ratio. However, it can be useful to compare a company’s P/E ratio with the P/E ratios of other companies in the sector, with the market in general or with the company’s historical P/E ratio.