Price/Earnings Ratio

Submitted by Sharemarket News on 28 April, 2011 - 16:18

Price/Earnings ratio (also called earnings multiple) is the amount of money you pay for every dollar the company earns. The formula for the P/E ratio is market value per share divided by earnings per share (EPS). Let's say share price of company ABC is at $15 and earnings per share is $2. The P/E ratio is $7. Company XYZ, on the other hand, has a share price of $10 with an EPS of $5. P/E ratio is $2.

This means XYZ is cheaper than ABC, since you pay only $2 per dollar earning of XYZ. A high P/E ratio means the market is willing to pay more for $1 of the company's annual earnings. A company with a high P/E ratio signifies high expectations and so are considered to be riskier than a company with a low P/E ratio. The PE ratio can also help you calculate share price value.

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