The Price Earnings Ratio (P/E), or earnings multiple, is the ratio that divides a company's market capitalisation (or equity value) by its annual net profit. It expresses the number of years of earnings required to recover the acquisition price of the shares, and is one of the most widely used valuation indicators in financial analysis and business valuation.

‍

Its formula is straightforward: P/E = Share price / Earnings per share (EPS), or equivalently: Equity value / Net income. A P/E of 15x means the buyer pays 15 times the company's annual net income. The higher the P/E, the more the market anticipates future growth — or the greater the premium paid for asset quality.

‍

The P/E must be distinguished from EBITDA and EBIT multiples frequently used in SME M&A: these apply to enterprise value (including debt), while the P/E applies to equity value. To derive an implied P/E from an enterprise multiple, the financial structure and tax rate must be taken into account.

‍

Example: a B2B software company (net income CHF 1.2 million) is valued by reference to a panel of listed peers showing a median P/E of 18x. After applying a liquidity discount of 30%, the retained P/E is 12.6x, giving an equity value of CHF 15.1 million — consistent with the EBITDA multiple derived from the DCF approach.

‍

At Hectelion, we use the P/E ratio as a complementary indicator in our multi-method valuations, adjusted for the specificities of non-listed Franco-Swiss SMEs.