What is P/E Ratio and Why Does It Matter in Stock Investing?
The Price-to-Earnings Ratio (P/E Ratio) is one of the most commonly used tools to evaluate whether a stock is reasonably priced. It helps investors figure out how much they are paying for each pound of a company’s earnings.
In simple words, P/E ratio = Share Price ÷ Earnings per Share (EPS)
This number indicates how expensive or cheap a stock is based on the company’s earnings. It doesn’t require complex formulas or financial expertise, which is why beginners and seasoned investors alike favour it.
Types of P/E Ratios You Should Know
There are mainly two types of P/E ratios that you’ll come across:
- Trailing P/E – Based on earnings from the past 12 months.
- Forward P/E – Based on projected earnings over the next 12 months.
Trailing P/E shows past performance. Forward P/E gives a glimpse into future potential. Both are important in different contexts, especially in the fast-moving UK market.
How to Find the P/E Ratio of UK Stocks
Here’s how you can check the P/E ratio for any UK-listed company:
- Visit financial websites such as Yahoo Finance UK, the London Stock Exchange, or FT.com.
- Search for the stock (e.g., Tesco, BP, Rolls-Royce).
- Look under the “Valuation” or “Key Statistics” section to find the P/E ratio.
Suppose you’re using a brokerage account, such as Hargreaves Lansdown, IG, or Trading 212. In that case, they also provide the P/E ratio directly in the company’s profile.
Interpreting the P/E Ratio: What is “High” or “Low”?
Here’s how to think about it:
- Low P/E (e.g., under 10) – Could mean the stock is undervalued or the business has slowed down.
- Average P/E (10–20) – Normal for many UK stocks, particularly those with exceptionally stable performance.
- High P/E (20–40 or more) – The stock might be overvalued, or investors expect massive growth.
A low P/E is not always a good thing, and a high P/E is not always bad. Context is key.
Compare P/E Ratios Within the Same Sector
This is a golden rule.
Let’s say you’re looking at two banks:
- Lloyds Bank: P/E = 7
- Barclays: P/E = 10
Barclays seems more expensive. However, if Barclays has more favourable growth forecasts, the higher P/E might be justified. Always compare apples to apples – tech vs. tech, retail vs. retail, pharma vs. pharma.
Limitations of the P/E Ratio
Don’t just rely on P/E. It has its blind spots.
- It doesn’t factor in debt, which can weigh a company down.
- It doesn’t reflect future risks or potential.
- Negative earnings? The P/E ratio becomes meaningless or misleading.
Use P/E as a starting point, not the only point of reference.
How UK Investors Use the P/E Ratio
UK-based investors often combine P/E ratio analysis with:
- Dividend yield: Especially in FTSE 100 companies.
- Growth projections: For mid and small-cap stocks.
- Historical averages: To see how current P/E compares with past years.
This gives a well-rounded view of a stock’s actual value.
Real Examples of UK Stocks by P/E Ratio
Here’s a look at how some well-known UK stocks typically show up on the P/E scale:
CompanySectorP/E Ratio (approx.)
Tesco Retail 14
BP Energy 6
Unilever Consumer Goods 18
Barclays Banking 9
Diageo Beverages 22
(Note: P/E values can change, so always double-check before investing.)
Benefits of Using P/E Ratio in UK Stock Analysis
- Quick valuation: Easy to compare many stocks in minutes.
- Spot underpriced opportunities: Especially in market dips.
- Helps avoid overpaying: Protects from hype-driven stocks.
- Simple and beginner-friendly: No advanced maths required.
- Helps filter stocks: Narrow down choices from thousands.
What Not to Do with P/E Ratio
- Don’t compare across unrelated industries.
- Don’t treat P/E as the only metric.
- Don’t overlook external factors, such as the economy, government policy, or the implications of Brexit.
Tips for Smart Use of P/E Ratio in the UK Market
- Follow industry averages: Know what’s “normal” in each sector.
- Use with earnings growth: A fast-growing company can justify a higher P/E.
- Look at historical trends: Compare the current P/E with the 5-year average.
- Monitor market sentiment: Political changes, interest rates, and inflation impact valuations.
Conclusion: P/E Ratio is a Compass, Not a Map
Analysing UK stocks using the P/E ratio is not about finding the “perfect” number. It’s about getting a clearer picture, faster. It’s one of the simplest tools in investing, yet one of the most powerful when used with common sense and patience.
Whether you’re a DIY investor or someone just exploring the stock market, understanding P/E ratios helps you make more informed, balanced decisions.
Interested in Stock Market Events and Learning More?
If you want to attend professional investment expos, learn from traders, or meet experts discussing UK stocks and tools like P/E ratios, visit the upcoming Investing & Trading Show held in London every year.
You can check dates, speakers, and book your tickets here: