Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year;
$25. 50 = 10 times $2. 55
XYZ stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per share or expected annual earnings per share. The New York Times Financial Glossary
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Current stock price divided by trailing annual earnings per shareor expected annual earnings per share. Assume XYZ Co. sells for $25.50 per share> and has earned $2.55 per share this year; $25.50 = 10 times $2.55. XYZ stock sells for ten times earnings. Bloomberg Financial Dictionary
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See price to earnings ratio. Dresdner Kleinwort Wasserstein financial glossary
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price-earnings ratio ( PE)
The P/E ratio is the most important yardstick for assessing the relative worth of a share. It reflects the markets appraisal of the shares future prospects. A high P/E ratio suggests a company has good prospects of achieving above-average growth in the future. The P/E ratio of a company is calculated by dividing its share price by its earnings per share.
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Price/Earnings ratio ( P/E ratio)
A measurement of a company's rating, calculated by dividing the share price by the annual earnings per share.A high P/E ratio means the company is highly-rated by the stock market, suggesting that investors think its prospects are good. London Stock Exchange Glossary
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Price/earnings ratio (PER) is the latest closing share price divided by the net profit for the latest reported 12-month period. If a company has an EPS of 10 and a share price of 150, its P/E is 15. In other words, it would take fifteen years for the stock investment to pay for itself. The reverse of the P/E ratio is the 'earnings yield', or 1/PER. A company with a P/E of 15 has an earnings yield of 6.66 percent (1 divided by 15).
The ratio is one of the most important tests of investment value and is widely used by the media as an indicator of whether a stock is expensive or cheap. The higher the PER, the higher the market values the company's earnings. A high PER may be a sign that the market expects the company's earnings to grow rapidly, or it may be a sign that earnings have slumped and the share price does not yet fully reflect that fall. A relatively low P/E means that investors' outlook for the company is gloomy, and that they do not want to buy the share even at that low multiple.
Average P/E ratios for stock market indices historically range between 10 and 20, but for some individual companies the ratio might swing wildly, from less than three to 1,000 or more, depending on investors' outlook for the share. Sometimes even stock market indices have average P/Es of 50 or more, as was the case in Japan in the late 1980s and the US NASDAQ market at the start of this century.
An historic PER is calculated using earnings figures already released and a prospective PER is calculated by using consensus estimates of figures yet to be released. If investors expect a company's earnings to triple every year in the next five years, they will have no problem paying a historical (or 'trailing') P/E of 1,000, because the P/E for Forecast Year 1 would be 333; for FY2 the P/E would fall to 111; and so on.
P/E ratios cannot be considered in isolation and should be compared against industry and national averages. Low-growth companies such as steel makers, shipyards and construction companies often trade at relatively low P/Es (10 or less) while high-tech firms often command P/E multiples of 40 or more.
The P/E ratio is the most widely used measure of corporate valuation, because it is easy to understand and widely available in financial newspapers, but it also has many flaws. The divider - net profit - is subject to the vagaries of accounting standards, depreciation regimes, interest rate levels and corporate tax rates. Two companies having the same cash flow may have very different bottom-line net profits. That is why analysts increasingly use price/EBITDA (earnings before interest, taxation, depreciation and amortization). If a company has no earnings, which is often the case with high-tech start-ups, investors will look higher up on the profit and loss account and relate the stock price to sales in order to work out the price/sales ratio (stock price divided by sales per share).
The divider of the P/E ratio - market capitalization - is not a perfect measure of the total cost of the company either. Two companies with a market capitalization of $1 billion and net profit would each have a P/E of 10. But if company A has debt of $1 billion, while company B is debt-free, the P/E ratio would not highlight this. Therefore, analysts replace market cap by 'enterprise value', which is the sum of market cap, plus debt, minus cash and gives a much better perspective on the true value of a listed company.
The enterprise value/EBITDA ratio measures both value and risk and eliminates the distortion of national depreciation rates, interest rates and tax regimes. Its drawback is that it requires a lot of homework.
Formula: Share Price/EPS Example
The Old Rope Corporation's share price is now £1.50 or 150 pence. The company's earnings per share (EPS) were 18.3 pence in the last complete financial year. They are forecast to be 20.5 pence in the current financial year and 24.3 pence in the following year.
Old Rope's P/E
Last financial year = 150 / 18.3 = 8.19 This financial year = 150 / 20.5 = 7.31 Next financial year = 150 / 24.3 = 6.17
The comparative trailing P/Es for Old Rope, its main country index and its sector index are:
Old Rope 8.19
All Share Index 10.12
Sector Index 9.50
► See also EPS, PEG Ratio.
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P/E ratio UK US noun [C] (also P/E multiple)
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The P/E ratio is a key gauge used by the City in assessing the price of shares.