What is P/E Ratio?

What is ____ (3)

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The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market prospect ratio that calculates the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings.

Investors often use this ratio to evaluate what a stock’s fair market value should be by predicting future earnings per share.

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Definition & Formula: http://www.myaccountingcourse.com/financial-ratios/price-earnings-ratio
Definition & Formula: http://www.myaccountingcourse.com/financial-ratios/price-earnings-ratio

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Market Value Price per Share:

MSFT Price

EPS:

EPS Calculation

P/E Ratio:

PE

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-Refer to What is EPS?

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Pros

  • Easy to use to value a company

Cons

  • Can only be used for companies in the same industry
  • Can be easily manipulated with accounting techniques
  • Ignores the impact of debt/leverage to boost earnings

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The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. This is why the price to earnings ratio is often called a price multiple or earnings multiple.

Companies with higher future earnings are usually expected to issue higher dividends or have appreciating stock in the future. A company with a high P/E ratio usually indicated positive future performance and investors are willing to pay more for this company’s shares.

Investors use this ratio to decide what multiple of earnings a share is worth. In other words, how many times earnings they are willing to pay.

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