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What is the p/e ratio and how do I find it for a company?

Ellie Kesselman
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Pablo Fernandez
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3 Answers3

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The price to earnings ratio is a measure of the company's current share price compared to the annual net earnings per share. The other way to think about this is the number of years a company would take to pay back the share price if the earnings stay constant. This ignores factors like inflation and can be used as an indicator of risk. During the internet bubble many companies had P/E above 24 and no possible means of earning back the share prices that were inflated largely due to speculation.

Most tools like Google Finance will list the P/E for a particular quote.

still_dreaming_1
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Zephyr
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  • So, the lower the p/e, the better, correct? Do they use the last year or the last 365 days? That is, does the earnings change from day to day? – Pablo Fernandez Dec 30 '09 at 15:49
  • @Chris - Sorry that's what I meant - will update. – Zephyr Dec 30 '09 at 16:58
  • @J. Pablo - That's correct lower P/E is better. Usually this will be the latest annual earnings report however when a company reports it's revenue is subjective as it depends on the company's fiscal year end. Earnings will not change day to day since they do not report over such a short period. – Zephyr Dec 30 '09 at 17:03
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    OK now I think in that context you need to say "market value" and not "book value" .. :-) – Chris W. Rea Dec 30 '09 at 17:12
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    It may complicate things, but I want to add that there are different sorts of P/E ratios. There's ones based on past earnings and less common ones based on expected future earnings. while I tend to like the ones based on past earnings, they can be misleading if the company had some exceptional earnings in the last year that can't be expected to be repeated. – chrisfs Feb 01 '11 at 09:45
  • @J. Pablo -- lower isn't better. Companies with easily predictable earnings like utilities have low P/E ratios. Growth companies tend to have higher P/Es, and that's ok. – duffbeer703 Aug 12 '11 at 04:52
  • @ChrisW.Rea is right. "Book value" has nothing to do with it. – Eric Oct 31 '11 at 20:28
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The PE ratio stands for the Price-Earnings ratio.

The price-earnings ratio is a straightforward formula:

Share Price divided by earnings per share.

Earnings per share is calculated by dividing the pre-tax profit for the company by the number of shares in issue.

The PE ratio is seen by some as a measure of future growth of a company. As a general rule, the higher the PE, the faster the market believes a company will grow.

This question is answered on our DividendMax website: http://www.dividendmax.co.uk/help/investor-glossary/what-is-the-pe-ratio

Cheers

DividendMax
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  • Did you mean to say "pre-tax profit"? Because the E in PE ratio is net income. After tax. – Eric Oct 31 '11 at 20:27
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PE ratio is the current share price divided by the prior 4 quarters earnings per share. Any stock quote site will report it. You can also compute it yourself. All you need is an income statement and a current stock quote.

Eric
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