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Price to earnings ratio definition

Description

P/E ratio shows the amount of net income (earnings) per one share. It is one of the most popular investment evaluation ratios. While calculating this ratio, the net income (one of the most important measure of profitability) is used, therefore, knowing how much earnings per share are earned is very important for the owners and investors. P/E ratio is sometimes known as a multiple ratio, as it shows how much the investor pays for one dollar of net income of the company’s share he is buying. Data to calculate this ratio is collected from statement of market bulletin and income statement.

It is a very important ratio for the company’s investors. This ratio is calculated mostly for the period of one year or a quarter, but it can also be calculated for other periods. It is popular to estimate the value of P/E ratio for the future periods of time.

Norms and limitations

There are no general norms for this ratio.

The higher value of the ratio enables share buyers to expect a possible growth of the company’s market value. It is recommended to compare this ratio with those of the companies, working within the same industry.

Formula

Share price shows the current market price of the share.

Earnings per share are calculated by dividing net income from shares outstanding.