The price-to-earnings ratio (P/E ratio) relates a company's market value to its annual earnings. A P/E ratio of 15 means that the market value is fifteen times these earnings. Critivest calculates it from the market capitalization and the reported net income.
PERatio > 0 and PERatio < 15
How is the P/E ratio calculated?
P/E ratio = market capitalization / net income
This equals the share price divided by earnings per share, without going through the number of shares; with several share classes, it can differ from it. The earnings yield is the inverse of the P/E ratio: net income divided by market capitalization, the earnings for each unit of market value.
What does a P/E ratio of 15 mean?
For the fictional Example Company:
| Market capitalization | EUR 30 billion |
|---|---|
| Net income of the last four quarters | EUR 2 billion |
| P/E ratio | 30 / 2 = 15 |
| Earnings yield | 2 / 30 ≈ 0.067, i.e. 6.7% |
When is the P/E ratio of little use?
What does a negative P/E ratio mean?
A negative P/E ratio means that the company reported a loss for the period used. For example, a market capitalization of EUR 30 billion and a net loss of EUR 2 billion give a P/E ratio of −15. As an earnings multiple, this value is not meaningful; with earnings of zero, the P/E ratio cannot be calculated. The preset criterion therefore also checks that the P/E ratio is greater than 0.
Further limits of the P/E ratio
- One-off effects such as gains from disposals or large write-downs distort a year's earnings and thus the P/E ratio.
- For cyclical companies, the P/E ratio is often low at the peak of earnings and high at the trough. Typical values also differ widely between industries.
- The P/E ratio does not take debt into account. The enterprise value includes it.
- A low P/E ratio only means that the market value is low relative to the latest earnings. It says nothing about future developments.
Using the P/E ratio as your own criterion
The preset criterion “Price-to-earnings ratio less than 15” checks this condition:
PERatio > 0 and PERatio < 15You set the limit yourself; 15 is an example, not a recommendation.
Which data does Critivest use for the P/E ratio?
The market capitalization is the latest stored market value. The net income is the total of the last four quarters or, if four complete quarters are not available, that of the latest fiscal year. It is the income attributable to the shareholders of the parent company. Amounts from the report are converted to the currency of the stock.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: PERatio
PERatio = MarketCapitalization / NetIncomeMarket capitalization divided by reported net income attributable to the parent over the last four quarters, without preferred-dividend adjustments. Not meaningful for nonpositive earnings; may differ from diluted-EPS P/E
Name in conditions: EarningsYield
EarningsYield = NetIncome / MarketCapitalizationReported net income of the last four quarters divided by market capitalization
Names used in conditions
MarketCapitalization- Market capitalization
NetIncome- Income statement, last 4 quarters or fiscal year: Net income
Related formulas
- P/B ratio (price-to-book ratio): The P/B ratio compares market value with balance sheet equity. Formulas and a worked example also explain tangible book value, which excludes intangible assets.
- Enterprise value: Enterprise value adds debt, minority interests and preferred stock to the market capitalization and subtracts cash and equivalents.
- Free cash flow: Free cash flow is the operating cash flow less capital expenditures. Related metrics include the free cash flow yield and the price-to-free-cash-flow ratio.
Sources
- Price–earnings ratio, Wikipedia
Last updated: November 4, 2026