Price to Earnings (PE) Ratio

The P/E Ratio relates market price to earnings per share.

Given the market price per share, net income from a company's
income statement and the number of shares outstanding
Earnings per !hare " #$et %ncome& / #$umber of shares
outstanding&
P/E Ratio " #'arket price per share& / #Earnings per share&
Generally, the higher the P/E multiplier, the more the market
re(ards earnings by the company in terms of share price.
) valuation ratio of a company's current share price compared to
its per*share earnings.
+alculated as

,or e-ample, if a company is currently trading at ./0 a share and
earnings over the last 12 months (ere .1.34 per share, the P/E
ratio for the stock (ould be 22.54 #./0/.1.34&.
EP! is usually from the last four 6uarters #trailing P/E&, but
sometimes it can be taken from the estimates of earnings e-pected
in the ne-t four 6uarters #pro7ected or for(ard P/E&. ) third
variation uses the sum of the last t(o actual 6uarters and the
estimates of the ne-t t(o 6uarters.

)lso sometimes kno(n as 8price multiple8 or 8earnings multiple8.
%n general, a high P/E suggests that investors are e-pecting
higher earnings gro(th in the future compared to companies (ith a
lo(er P/E. 9o(ever, the P/E ratio doesn't tell us the (hole story
by itself. %t'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 o(n historical P/E. %t (ould 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 #lo( P/E& as each industry has much
different gro(th prospects.

The P/E is sometimes referred to as the 8multiple8, because it
sho(s ho( much investors are (illing to pay per dollar of
earnings. %f a company (ere currently trading at a multiple #P/E& of
25, the interpretation is that an investor is (illing to pay .25 for .1
of current earnings.
%t is important that investors note an important problem that arises
(ith 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 6uality of the P/E only as good as the
6uality of the underlying earnings number.