What is the P/E ratio?

The price-to-earnings ratio, or P/E, is how much investors are paying for one dollar of a company's profit. Take the share price, divide by the company's earnings per share over the trailing twelve months, and the answer is the ratio. A stock at $100 with $4 of trailing earnings has a P/E of 25. The same earnings in a stock at $200 would give a P/E of 50. The denominator is the company; the numerator is how the market currently prices it.

Two flavours of P/E circulate. Trailing P/E uses the last twelve months of reported earnings, which is concrete but backward-looking. Forward P/E uses analysts' estimates for the next twelve months, which captures expectations but inherits the estimate error. When you see a P/E quoted without a label, it is almost always trailing. Forward P/E tends to be lower than trailing when earnings are growing, because the denominator is bigger; it tends to be higher when earnings are expected to fall, for the same reason inverted.

A high P/E is not bad and a low P/E is not good. A high P/E says investors expect future earnings to grow into the price, or that the company has rare quality the market is willing to pay up for. A low P/E says investors are sceptical of future growth, the business is mature with limited reinvestment runway, or there is risk in the underlying that demands compensation. Comparing a tech P/E to a bank P/E tells you very little. Comparing two banks' P/Es tells you a lot.

For investors in Mexico, Brazil, Colombia, Peru and Chile, the LATAM equity discount is the single most quoted statistic in the region. Brazilian banks like ITUB4 and BBDC4 routinely trade at P/Es around 8 while their US peers JPM and BAC sit at 10 to 12. Brazilian Vale at a P/E of 5 is not cheap by accident: part of the multiple is sovereign and currency risk pricing, the other part is cyclical commodity exposure. The discount has two narratives. One is structural: emerging-market regimes pay a permanent premium for capital because investors demand it. The other is opportunity: if the underlying business holds up, the cheaper multiple eventually re-rates.

Three threads pull this together. First, P/E is the most common way an investor consciously prices the future cash a company will generate, which is what owning a stock ultimately gives you a claim on. Second, multiples and risk are linked: higher-volatility names tend to carry either premium P/Es when the volatility is upside-skewed (growth) or discount P/Es when it is downside-skewed (cyclicality). Third, sector and regional dispersion in P/E is exactly why diversifying across sectors matters: a basket weighted toward one industry inherits its multiple regime, for better or worse, and the same scale logic applies to company size, where LATAM's smaller mega-cap roster partly explains why regional multiples sit lower than US averages.