Skip to content 
The price-to-earnings (P/E) ratio compares a company’s share price with its earnings per share, showing how many ringgit investors pay for each ringgit of annual profit. A lower P/E can suggest a cheaper stock and a higher P/E can suggest a more expensive one, but the number only makes sense when compared with the company’s growth, its own history and similar companies.
This guide explains how to calculate the P/E ratio, how to read it and the traps that catch beginners.
Key takeaways
- P/E ratio = share price divided by earnings per share (EPS).
- Trailing P/E uses past earnings; forward P/E uses forecasts.
- Compare P/E with the company’s history and its direct peers.
- A low P/E can signal a bargain or a business in trouble.
- Use P/E alongside cash flow, debt and growth, never on its own.
How to calculate the P/E ratio
The formula is simple: divide the share price by earnings per share. If a share trades at RM4.00 and the company earned 40 sen per share over the past year, the P/E ratio is 10. Investors are paying ten times annual earnings.
| Share price | EPS (12 months) | P/E ratio |
|---|---|---|
| RM4.00 | RM0.40 | 10.0 |
| RM4.00 | RM0.20 | 20.0 |
| RM2.00 | RM0.40 | 5.0 |
Trailing P/E vs forward P/E
Trailing P/E uses the last twelve months of reported earnings, so it is based on facts. Forward P/E uses analysts’ forecasts of future earnings, which may turn out wrong. Both are useful, but know which one you are looking at before comparing numbers.
What a high or low P/E can mean
- High P/E: investors expect strong growth, or the share may be overpriced.
- Low P/E: the share may be undervalued, or the market expects earnings to fall.
The number tells you what the market expects, not whether the market is right. Your job as an investor is to judge whether those expectations are reasonable.
Always ask what would need to happen for the current P/E to make sense.
How to compare P/E ratios fairly
P/E ratios differ widely between industries. Fast-growing technology companies often trade at higher multiples than mature utilities or banks. Comparing a technology company’s P/E with a plantation company’s P/E tells you very little.
- Compare the company with its direct peers on Bursa Malaysia.
- Compare it with its own P/E range over several years.
- Check whether earnings are growing, stable or falling.
- Look for one-off items that inflate or depress earnings.
The value trap problem
A low P/E can be a trap. If a company’s profits are about to fall, today’s P/E looks cheap, but tomorrow’s will not. Warning signs include falling revenue, shrinking margins, rising debt and operating cash flow well below reported profit. Our guide to fundamental analysis for beginners shows how to check these areas.
One-off items and distorted earnings
Earnings can be inflated by one-off gains, such as selling a property, or depressed by one-off charges, such as impairments. Read the notes to the accounts and the management commentary to find these items, and consider calculating P/E on underlying earnings that exclude them.
A worked comparison
Imagine two listed companies in the same industry. Company A trades at a P/E of 8 and Company B at a P/E of 18. At first glance, A looks cheaper. Now add context. Company A’s revenue has fallen for three years and its debt is rising. Company B has grown earnings steadily, carries little debt and converts most of its profit into cash.
In this case, the market is paying more for B because its earnings look more reliable and more likely to grow. A may still be a bargain, but only if you have good reason to think its problems are temporary. The P/E ratio started the conversation; the financial statements finished it.
When P/E is less useful
P/E does not work for loss-making companies, because there are no earnings to divide by. It is also less informative for companies with very cyclical profits, such as commodity producers, where earnings can swing sharply from year to year. In these cases, investors often look at price-to-book, cash flow or average earnings over a full cycle.
Using P/E in a wider valuation
Treat P/E as a starting question, not a final answer. Combine it with dividend yield, return on equity, debt levels and cash flow to form a fuller view. Our Hype vs Reality: Is This Stock Cheap or Overpriced? session teaches a practical routine for testing whether a share looks cheap or overpriced, and our Financial Analysis & Investment Fundamentals with AI course covers valuation in more depth.
Frequently asked questions
What is a good P/E ratio in Malaysia?
There is no single good number. It depends on the industry, the company’s growth and its history. Compare with direct peers and the company’s own range.
Is a low P/E ratio always good?
No. A low P/E can signal that the market expects earnings to fall. Check revenue, margins, debt and cash flow before deciding.
What does a negative P/E mean?
It means the company made a loss, so the P/E ratio is not meaningful. Use other measures instead.
Where can I find a company’s EPS?
Earnings per share is reported in quarterly and annual reports published on Bursa Malaysia.
Should I use trailing or forward P/E?
Use both, but know the difference. Trailing P/E is based on reported results; forward P/E depends on forecasts.
Want structured guidance? Albertstein Consultancy runs stock market and investment courses in Malaysia, live on Zoom and in person in Kuala Lumpur. See our investment courses and upcoming sessions or contact us.
This article is for educational purposes only and is not investment, tax or legal advice. Consider your own circumstances and seek licensed professional advice before making financial decisions.