Back to the Basics: Price-Earnings Ratio (P/E Ratio)

Why You Should Take a Look at Multiple PE Ratios When Evaluating a Stock

Considered by many investors as a “quick” way to value a stock, the Price-Earnings Ratio can be a key valuation metric to making informed stock investment decisions. And, the price to earnings ratio [P/E Ratio] is one metric that has more to it than meets the eye.

What is a Price-Earnings Ratio (P/E Ratio)?

Plain and simple, the P/E Ratio for a stock is calculated from its current market price per share [P] in relation to the stock’s earnings per share [EPS]. Below is a look at the PE Ratio formula.

Generally, the market looks at high P/E Ratios as growth stocks and low P/E Ratios as value oriented stocks. The P/E Ratio is basically showing what the shares are worth compared to the company’s past earnings.

While a stock’s current market price is universally available on sites like Yahoo Finance http://finance.yahoo.com/ you may come across some inconsistencies with the EPS. Why is that?

Well, “…investors routinely debate if the price of a company is the current reflection of its value, [and] everybody agrees that the price represents what an investor will pay for the stock right now.” ^[1] Price is what we see on the ticker—but the EPS is not as consistent.

So, if we really want to understand a stock’s P/E Ratio, then we should at least know…

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Posted by:

Mike Casson
Executive Editor
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