P/E Ratio (Price to Earnings Ratio)Knowledge Center 
Measuring market performance. Explanation of P/E ratio. 
What is the P/E Ratio? DescriptionThe Price to Earnings ratio (P/E ratio) is a valuation ratio of a company's current share price compared to its pershare earnings. Discounted Cash Flow is a superior method to value a company. However sometimes investors prefer to use simpler methods. Calculation of P/E Ratio. FormulaThe P/E ratio is used for measuring market performance and can be calculated as: P/E ratio calculation: Market Value per Share : Earnings Per Share normally for a twelve month period.
Often the P/E ratio is used, because it is so easy to grasp: If you buy stock at a P/E ratio of 10, say, this means it will take 10 years for the company's earnings to add up to your original investment  10 years before you are paid back. Example of Price to Earnings Ratio calculationTake for example a company that earned $10M last year, and had given out
1 million shares in total. Earnings per share are $10. If that company's shares
currently sell for $100 per share, it has a P/E ratio of 10. Stated differently,
at this price, investors are willing to pay $10 for every $1 of last year's
earnings. Limitations of the P/E RatioThe Price to Earnings ratio assumes that the corporation will be worth some multiple of its future earnings. This method has at least two drawbacks:
Book: Steven M. Bragg  Business Ratios and Formulas : A Comprehensive Guide  Book: Ciaran Walsh  Key Management Ratios 
Compare with the P/E Ratio: PEG Ratio  Market Value Added  EBIT  EBITDA  Economic Margin  Return on Equity  TSR  PRVit Return to Management Hub: Decisionmaking & Valuation  Finance & Investing 
 




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