what is the P/E Ratio?

Answer 1

Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:
market value per share, divided by, earnings per share (EPS)

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Also sometimes known as "price multiple" or "earnings multiple".

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. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The 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 were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Answer 2

The P/E ratio of a company is the current share price of the company divided by the company's earnings per share for the last 12 months.

If you want to calculate a forward P/E ratio, you'd use the current price divided by the estimate of earnings per share for the next 12 months.

As one of the other folks on here suggested, if the company is losing money the P/E ratio is meaningless, since you'd have a zero as a denominator for that equation.

Also, and just fwiw, be advised that all earnings are not created equal. So, unless you know a fair amount about accounting and how to go about interpreting a company's financial statements, a P/E ratio doesn't mean much at all . Cash flows are more difficult to manipulate, however, so a price to operating cash flow per share ratio is more useful.

If you start looking at this kind of stuff, make sure you look at five years of company data just for starters to see how the numbers trend over time.

Hope this helps.

-- hh

Answer 3

Price to earnings is the relationship between the stock's price and their annual earnings per share.

So a stock that makes $2/share and sells for $60 has a P/E of 30.

The theory is if a stock has a low P/E, then it might be undervalued and eventually the stock market will realize this and the stock's price will increase.

Using P/E ratio is an "old" way to pick stocks used for generations since other data on companies were not as easily accessible. Nowadays, selecting stocks is a much more refined process where you might consider earnings, earnings growth, sales, insider trading, as well as a number of other attributes.

You might consider picking up How to make money in Stocks in good times and bad by William O'Neill who's CANSLIM method is very well known.

That'll help you get a good basic understanding of what makes a successful stock successful!

Hope that helps!

Answer 4

Refers to the price of the Stock divided by the earnings per share. This means that with no earnings there is no P/E, and if there are losses the P/E is negative.