Level 1 · Start Investing Smarter
Price, value, and one multiple
A good business is not automatically a good investment. The price decides how much success you are already paying for.
By the end, you can calculate one P/E, say what it means, and explain why a lower number is not automatically a better investment.
Free lesson from The Independent Investor. About 10 minutes, then a short check with feedback. No account needed.
Price is the offer. Value is your argument
Price is what the market asks for one share today. Value is your reasoned estimate of what that piece of the business is worth, based on what the business may earn and how unsure you are. Price is visible. Value has to be argued.
That is why “I like Apple” is not yet an investment case, and “Nike fell” is not yet a bargain. The same business can be attractive at one price and unattractive at another.
One rough lens: price to earnings
P/E divides the price of one share by the earnings attached to one share. It tells you how many dollars buyers are paying for each dollar of the selected earnings. It does not tell you the right multiple, predict the future, or produce fair value.
What earnings per share is
Earnings per share is the company’s profit for common shareholders, spread across the shares that count in the calculation. On the income statement it starts after revenue and costs, then interest and tax. It is not revenue, the money customers pay the company, and it is not the same as cash in the bank.
Diluted earnings per share includes the effect of options and similar instruments that could add shares. That is why Nike’s lesson uses diluted EPS: it matches how many shares the profit is really spread over. Always note which year or period the EPS belongs to before you divide price by it.
Apple and Nike are different bets
Apple · dated illustration, 25 July 2026
35×
$333 divided by about $9.50, rounded. Not a live quote, not fair value, and the $9.50 is not Apple’s FY2025 statement EPS.
Buyers at that illustration are paying a high price for the earnings used. They need Apple to keep earning strongly for a long time. A high multiple can be justified. It can also leave little room for disappointment.
Nike · dated illustration, 17 October 2026
about 18×
About $37 on 17 October 2026 divided by $2.10 of diluted earnings for the year ended 31 May 2026. Not a live quote, and not a trailing-twelve-month P/E.
Nike’s diluted earnings were $3.73 in the year ended May 2024, $2.16 in 2025, and $2.10 in 2026. The lower multiple sits beside earnings that fell. It may be an opportunity, a warning, or both. The number does not decide.
Both multiples are dated illustrations chosen to show the method. Today’s prices and earnings will differ, and neither is a recommendation.
Move the price and the earnings
Predict first
Nike’s share price stays at $37. Its earnings per share fall from $3.73 to $2.10. What happens to the P/E?
Start with Nike’s lesson inputs, then move either half of the equation. A share can become more expensive on a P/E basis without its price rising, simply because earnings fell. This is arithmetic, not a fair-value range.
Calculated P/E
17.6×
At these inputs, buyers pay about 17.6 dollars for each dollar of the selected earnings.
Illustrative arithmetic using adjustable inputs, not a live quote or stock valuation.
Growth belongs inside the question
A higher multiple can make sense when a durable business can grow its earnings for a long time. A lower multiple can be dangerous when the earnings are shrinking. Cheap does not automatically mean attractive. Expensive does not automatically mean bad.
The market may react to expected future earnings before the change appears in a reported result. A price can fall because investors expect weaker earnings, or rise because they expect a recovery. That does not make the expectation true. It explains why a reported P/E needs interpretation, not just arithmetic.
Do not turn that into a formula that declares one “correct” multiple. The useful question is plain: what growth and quality am I paying for, and can this business deliver them? The later valuation level will turn that into ranges and scenarios.
A mistake to avoid
Ranking two companies by P/E and stopping. The lower number may hide a weaker business or falling earnings. The higher number may reflect durable growth or excessive optimism. A multiple tells you where to investigate.
Worked examples show the method. They are not a recommendation to buy, hold or sell, and they do not consider your circumstances. Figures are illustrations and may be out of date.
