What is a P/E multiple?

The P/E multiple is the premium that the market is willing to pay on the earnings per share of a company, based on its future growth.

The ratio is most often used to conclude whether a stock is undervalued or overvalued.

The P/E is calculated by dividing the current market price of a company's stock by the last reported full-year earnings per share (EPS).The P/E thus computed is also known as the trailing or historical P/E since it uses the trailing (historical) EPS in its calculations.

With the advent of quarterly results, it is also possible to compute P/E, based on the earnings of the latest four quarters’ EPS. This is known as trailing twelve months P/E.

A variant of the P/E - called the forward P/E - has also been developed wherein the current market price of the stock is divided by the expected future EPS. The attempt to study P/E ratios in this manner reflects the effort to factor in the expected growth of a company.

For an investor it makes much more sense to look at the forward P/E for taking an investment decision.