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The P/E Ratio: What Does the Price to Earnings Ratio Mean

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How to Use the P/E ratio to value stocks

The P/E ratio is a basic metric used to determine the value of a company's stock. In a nutshell, it can tell you if a stock is 'cheap' or 'expensive'. In other words, are you getting a good value for what you are paying for?

How the P/E ratio is Calculated

How to Find the Price to earnings Ratio of a stock

The P/E ratio is probably one of the most quoted ways a stock is valued. However, it can be confusing to understand what this number really means. This ratio is simply a mathmatical expression for how much you are paying for each dollar the company earns every year.

For example:

Company A makes $1,000
Company A has issued 100 shares of stock
Company A stock is trading for $50 a share
The P/E is simply the earnings per share divided by the price per share.

So,

$1,000 (Earnings) / 100 (# of shares) = $10 per share.
Company A had $10 in profit for every share it has issued.
This is the Earnings part of the Price to Earnings Ratio

$50(The Price of each share) /$10 (The Earnings of Each Share) = 5

Company A would have a P/E of 5.
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Additional Resources on the P/E ratio

News and advice on P/E ratios

These are a few other sites that offer very in depth analysis and commentary on P/E ratios. If you are looking to dive a little deeper, make sure and check them out.


Business Network Plus Subscription
Price-Earnings Ratio - P/E Ratio
Investopedia.com - The Investing Education Site. Includes the most comprehensive investing dictionary on the web as well as articles and tutorials on nearly any aspect of the market.
P/E ratio - Wikipedia, the free encyclopedia
P/E ratio From Wikipedia, the free encyclopedia
P/E Ratio - A Quick and Dirty Way to Determine Relative Value
The p/e ratio, short for price earnings ratio, was made famous by Benjamin Graham. The p/e ratio is a financial measurement of a company's current earnings per share, eps, compared to the price per share.
Forbes Magazine
Forbes Magazine is one of the most widely read business and finance publications in the world. They have a great track record of providing interesting and insightful analysis and advice.

They also have a fantastic Free Personal Investing Guide

When to use the P/E ratio

Using the P/E ratio to invest in stocks

Many Value investors choose to use the P/E ratio as a valuable tool for finding out if a stock is cheap. Many Growth investors believe that the P/E ratio is inaccurate and is not very useful. Which kind of investor are you?

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Tips on Using the Price to Earnings Ratio

Remember these things when using the P/E ratio

The P/E Ratio can be a valuable tool, but it is important to remember that this one number does not tell the whole story. When using the P/E ratio to value a stock remember the following:

  • Compare the P/E ratio to other companies in the same industry. A P/E of 25 or even 35 is not necessarily out of line for some tech companies. However, many homebuilding companies have price to earnings ratios of 10 or less. You can not use P/E ratios to compare a home builder to Ebay.

  • Compare the current P/E ratio with the historic P/E ratio. The Historic P/E of the S&P is generally considered to be in the high teens (16-18). Does the stock have a P/E that is higher or lower than it has had in the past.

  • The Future P/E can be more useful than the present P/E. The future P/E is simply what analysts think the P/E value will be over the next 12 months. If this number is significantly higher or lower than the regular P/E than make sure you find out why.

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