| Price-Earnings Ratio - P/E Ratio The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio can be calculated as:
Market Value per Share / Earnings per Share
For example, suppose that a company is currently trading at $43 a share and its earnings over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05.
EPS is most often derived from the last four quarters. This form of the price-earnings ratio is called trailing P/E, which may be calculated by subtracting a company's share value at the beginning of the 12-month period from its value at the period's end, adjusting for stock splits if there have been any. Sometimes, price-earnings can also be taken from analysts' estimates of earnings expected during the next four quarters. This form of price-earnings is also called projected or forward P/E. A third, less common variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Breaking It Down: In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to...
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