PE Ratio

Price Earnings Ratio – PE Ratio – Price to Earnings Ratio

This calculates the market value of a stock relative to its earnings. The price earnings ratio shows what the market is willing to pay for a stock based on current earnings.

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

The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. The PE ratio is also called price multiple or earnings multiple. Investors use this ratio to decide what multiple of earnings a share is worth, i.e. how many times earnings they are  willing to pay.

The price earnings formula is calculated by dividing the market value price per share by earnings per share. This ratio can be calculated at the end of each quarter when quarterly financial statements are issued. The price to earnings ratio indicates the expected price of a share based on its earnings.

As a company’s earnings per share begins to rise, so does their market value per share. A company with a high P/E ratio usually indicates positive future performance and investors are willing to pay more for this company’s shares. A company with a lower PE ratio is indicative of poor current and future performance. This ratio is only useful for comparing companies within the same industry.

Example

Venum Sports stock is currently trading at £50/share and its earnings per share is £5. Venums PE ratio would be calculated like this.

50/5 = 10

So you can see, Venum’s ratio is 10 times. This means that investors are willing to pay 10 dollars for every dollar of earnings, the stock is trading at a multiple of 10.

PE = 10