P/E is price over earnings

EPS is net income divided by shares outstanding — the slice of profit attached to one share. P/E is price divided by EPS, which is the same as market cap divided by net income.

A P/E of 10 means ten years of today's earnings would sum to today's market cap, which is why it is often described as a payback period.

Invert it and you get earnings yield: 10x is 1/10, or 10%; 25x is 4%. In that form it compares directly against bond yields, which makes it obvious why high-multiple stocks wobble first when rates rise.

Trailing versus forward

Trailing P/E uses reported earnings from the last twelve months. It has the virtue of being fact, and the flaw of being history.

Forward P/E uses analysts' estimates for the next twelve months. It looks ahead, but it is an estimate, and estimates are known to skew optimistic.

If a stock trades at 30x trailing and 15x forward, the market expects earnings to roughly double. The gap between the two numbers is itself a statement of expectations. Comparing two stocks' P/E without knowing which basis each uses tells you nothing.

Traps that make a P/E look low

First, cyclicals. Semiconductors, shipping, refining and construction show their lowest P/E exactly when earnings peak, because the denominator is temporarily inflated. A low multiple there often signals a profit peak rather than a bargain — and at the trough the multiple explodes or goes undefined on losses.

Second, one-off gains. Selling a building or a stake in a subsidiary lands in net income and drops the P/E, on earnings that will not repeat.

Third, structurally low multiples. Businesses that have stopped growing, or that carry heavy regulatory or cyclical risk, stay cheap for years. That is their price range, not a discount.

So P/E is about comparison more than level: against sector peers, and against the stock's own five- to ten-year range.

Index and ETF multiples

Indexes carry a P/E too, normally aggregate market cap over aggregate net income — not a simple average, which one loss-making member could wreck.

The P/E shown on a fund page is the same kind of aggregate. It tells you what multiple the fund is paying for the market slice it holds. Products tracking the same index barely differ; funds with different mandates reveal how far each tilts toward growth.

The averaging problem persists. When an index multiple rises, whether everything got more expensive or only a few heavyweights did is a question only holdings and weights can answer — and the more top-heavy the index, the more that check matters.