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Individual Stocks

Price / Earnings Ratios and Other Calculations

What is a “Price/Earnings” Ratio?

A price/earnings ratio, or P/E ratio, is the current price of a stock divided by the amount of earnings per share. The earnings number used could be several past quarters of reported earnings, or even include a forecast of future quarterly earnings. Different industries have different growth prospects, and companies with high P/E ratios are expected to grow very quickly. In order for you to compute a price/earnings ratio, merely take the share price of the stock and divide it by the earnings or profit per share. But it is important to note that comparisons of P/E ratios work best when comparing similar target companies in similar lines of business. You cannot have a good comparison when you compare the P/E of an old yet highly profitable industrial company against a new startup Internet company, as their P/Es would be quite different.



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