Definition – What is Price Earnings (P/E)
Price Earnings is the ratio of the company’s share price to the earnings per share.
A P/E ratio of ‘1’ means that the company’s stock is trading at the same earnings per share as the company earns in one year.
A P/E ratio of ‘5’ means that the company’s stock is trading at 5 times the earnings per share that the company earns in one year.
A higher P/E ratio means that the company’s stock is trading at a high multiple to the latest earnings of the stock.
A lower P/E ratio means that the company’s stock is trading at a low multiple to the latest earnings of the stock.
Formula – How to calculate P/E
Price / Earnings = Price per Share / Earnings per Share
A business has a share price of $35 and earnings per share of $2.5.
P/E = $35 / $2.5 = 14.00
Therefore, this company’s price/earnings is 14.00.
Sources and more resources
- Wikipedia – Price-earnings ratio – Wikipedia’s entry on price-earnings. Includes information on how to use them to analyze a stock.
- INC Magazine – Price/Earnings (P/E) Ratio – A short article on the P/E ratio.
- The Balance – Using the Price-to-Earnings Ratio as a Quick Way to Value a Stock – An explanation on how price-earnings can be used to value a stock.
- Investopedia – Price-Earnings Ratio – P/E Ratio – An overview of the Price-Earnings ratio.