Price/Earnings Ratio (P/E)
Description
Price/Earnings Ratio (P/E) is a valuation ratio where a company's current share price is divided by its per-share earnings.
How this indicator works
- P/E Ratio is one of the most widely watched measures of valuation for both the stock market as a whole and for individual stocks. Many use it to determine whether the market (or a stock) is overvalued, fairly valued,or undervalued.
- In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.
- P/E is sometimes referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. If a company is trading at a P/E of 15, an investor would be paying $15 for $1 of earnings.
Calculation
The P/E ratio is calculated as follows:
P/E ratio = (Market Value per Share) / (Earnings per Share (EPS))
Where:
EPS is the summation of the last four quarters earnings.
