Definition of the Price-to-Earnings ratio
The Price-to-Earnings ratio (P/E), also called the PE ratio, P/E multiple or simply the earnings multiple, is the ratio between a stock's market price and the earnings per share (EPS) it generates.
In plain terms: the P/E indicates how many years of earnings investors are willing to pay to acquire a share. A P/E of 15 means the market values the company at 15 times its annual earnings. If earnings stayed constant, it would theoretically take 15 years to "recoup" the price paid.
Where the name comes from: "Price" = the stock's market price, "Earnings" = net income. The ratio compares what you pay (the market price) with what you receive (the earnings generated). It is a measure of how relatively expensive a stock is.
How to calculate the Price-to-Earnings ratio
A worked example
- Share price: €24.50
- Annual net income: €3.2 million
- Shares outstanding: 2 million
- EPS = 3.2M ÷ 2M = €1.60 per share
- P/E = 24.50 ÷ 1.60 = 15.3
Trailing P/E vs forward P/E
- Trailing P/E: uses the earnings actually reported over the last 12 months. Shown by default on most financial websites. Based on real figures.
- Forward P/E: uses the earnings expected for the next 12 months according to analyst consensus. More useful for high-growth companies, but relies on forecasts.
On small caps: forward estimates are often missing or unreliable due to thin analyst coverage. On Euronext Growth you mostly work with the trailing P/E.
How to interpret the P/E
There is no universally "good" or "bad" P/E. Interpretation always depends on context: the sector, the growth phase, the level of interest rates, and your investment horizon.
| P/E level | General interpretation | Signal |
|---|---|---|
| < 10 | Very low — potentially undervalued company, or one in trouble | Watch for a value trap |
| 10 — 15 | Low — attractive valuation if fundamentals are solid | Potentially interesting |
| 15 — 20 | Moderate — in line with the historical average for equity markets | Neutral |
| 20 — 30 | High — future growth expected, or an optimistic market | Requires sustained growth |
| > 30 | Very high — large growth or quality premium | High risk of disappointment |
| Negative | Loss-making company — P/E not meaningful | Use other ratios |
The P/E as a gauge of expected growth
A high P/E is not necessarily a bad sign. It often reflects the market's expectations of future growth. A company growing earnings at 25% a year deserves a higher P/E than a stagnant one. This is the logic of the PEG ratio (P/E ÷ annual earnings growth rate): a PEG below 1 is generally considered attractive.
P/E by sector: very different levels
Comparing the P/E of a biotech with that of a property company makes no sense. Each sector has its own reference levels.
| Sector | Typical P/E (Euronext Growth) | Why |
|---|---|---|
| Technology / SaaS | 20 — 40 | High expected growth, recurring revenue |
| Healthcare / Biotech | 15 — 50+ (or N/A) | Uncertain pipeline, often negative earnings |
| Industrials / Manufacturing | 8 — 15 | Cyclical, low structural growth |
| Business services | 12 — 20 | Decent visibility, moderate growth |
| Retail / Consumer | 8 — 14 | Thin margins, strong competition |
| Food & beverage | 10 — 16 | Defensive, low growth |
The golden rule: always compare a company's P/E to the median of its sector, not to the market average.
Limitations and pitfalls of the P/E
1. Unusable for loss-making companies
If net income is negative, the P/E is negative or infinite — and therefore meaningless. On Euronext Growth, a non-trivial share of companies (notably in biotech) report losses. For those, use EV/Revenue, Free Cash Flow, or sector-specific operating metrics.
2. Sensitive to accounting choices
Net income is the line most exposed to accounting decisions: exceptional write-downs, provisions, asset disposals, and so on. That is why many analysts prefer EV/EBITDA, which is less affected by these effects.
3. Ignores debt
A concrete example: a company with a P/E of 8 may look cheap. But if it carries €50M of net debt against €10M of net income, the total enterprise value is very different from what the P/E suggests. Always check the net debt/EBITDA ratio alongside it.
4. The value-trap pitfall
A very low P/E is sometimes the signal of a value trap — a company that looks cheap but whose earnings are about to deteriorate. If the market anticipates a future decline in earnings, it assigns a low P/E not because the company is undervalued, but because current earnings are not representative of the future.
P/E and European small caps: specifics
More volatile earnings
Small caps generally show greater year-to-year variability in their results. It is advisable to look at the average EPS over 3 years rather than the last year's EPS alone.
Liquidity and risk premium
Euronext Growth small caps typically trade at a liquidity discount relative to large caps. A P/E of 12 on a small cap can be as attractive as a P/E of 15 on a large cap.
What to combine the P/E with
| Ratio | What it adds to the P/E | Guide |
|---|---|---|
| EV/EBITDA | Neutralises the effect of debt and accounting choices | → EBITDA guide |
| Free Cash Flow | Checks that earnings actually convert into real cash | → FCF guide |
| ROCE / ROE | Measures the quality of capital use | → ROE guide |
| Net debt/EBITDA | Assesses the financial risk tied to debt | → Balance sheet guide |
Go further: the Fundamental Analysis cluster
See also the Euronext Growth guide to understand the market these analyses apply to, and the glossary for definitions of every financial term.
New to screening European small caps? See the European small-cap stock screener guide.