Price to Earnings ratio (P/E)

Definition of Price to Earnings ratio (P/E)

Price-Earnings Ratio or the P/E ratio is a price-to-earnings ratio and employed generally to determine the appropriate stock price of a company. This multiples is the most widely used and known of all multiples since it is very simple to calculate for most companies and makes comparisons simple, something that saves time and provides a good proxy of the fair value of a company. But P/E ratio is limited to apply to companies only with positive earnings and furthermore, volatility of earnings results in changes in the P/E ratio from period to period, which makes the P/E ratio less reliable. The simple calculation can be written as:


where P = share price and EPS = earnings (net income after tax) per share