A trailing P/E uses the last 12 months of earnings; a forward P/E uses analyst forecasts for the next 12 months. The Shiller cyclically-adjusted P/E (CAPE) averages 10 years of inflation-adjusted earnings, smoothing out the cycle. Long-term US market average is around 16; the SPI averages closer to 18 given Switzerland's tilt to high-quality consumer staples and pharma.
P/E says nothing about absolute value in isolation — it must be compared with the stock's history, sector average and growth rate. Apple at P/E 30 with 12% earnings growth is cheaper than a no-growth utility at P/E 18. The PEG ratio (P/E ÷ earnings growth rate) attempts to normalise; a PEG below 1 is often cited as cheap.
Persistent high or low P/E ratios reflect market expectations. Tesla traded at 1,000× earnings in 2020 because investors discounted explosive future profits; legacy auto trades at 5× because the market expects flat or declining earnings. A successful contrarian bet usually involves identifying mispriced expectations, not picking the lowest P/E.
P/E = Market price per share / Earnings per share (EPS)
Roche trades at CHF 240 with trailing earnings per share of CHF 18. Trailing P/E: 240 / 18 = 13.3. Implied earnings yield: 1/13.3 = 7.5%. Versus a 10-year Confederation bond yielding 1.5%, the equity risk premium is roughly 6 percentage points.