PE Ratio Calculator

What is the P/E ratio and how it is used by investors?

In financial industry also known as the price multiple, the price earnings ratio is one of the oldest, most simple, quick and most often used metrics when comparing multiple options and valuing stocks. It is calculated as the relative proportion of the current share price of a company against its reported earnings per share within a specific time frame.  

P/E ratio = Market Value per Share / Earnings per Share (EPS)

Independent on the shares you analyze or compare, what is important to note is that the EPS values that are considered should refer to similar time frames otherwise the PE ratio level may be irrelevant. Usually, earnings per share figures are estimated by considering the results a company reported within the last four quarters (this is the trailing P/E ratio), but there are some cases in which financial experts take into account the forecasted earnings for the next four quarters (this is a projected P/E ratio).

For instance, if a corporation is trading a share at $50 while its earnings per share over the last business cycle (1 year) were $2/share then its price earnings ratio would be $50/$2 = $25.

Even though the PE ratio calculation process is simple, its interpretation is quite difficult, as it requires many other factors to be considered into the analysis.

Basically, companies that aren’t profitable and efficient from financial point of view have a negative earnings per share which leads to negative/equal to zero PE ratio.

In other words the P/E ratio of a stock, demonstrates how much money specific investors are willing to pay per one unit of earnings a company may generate. For example a P/E ratio of $10 indicates that investors in a company’s stock are willing to pay $10 for every $1 of earnings that the corporation in question produces. Taking into account its role of helping investors compare between multiple shares, the recommended way of understanding the P/E ratio level is by concentrating on which are the signals of future growth prospects a company has and if the market has the same vision in relation to these prospects.
Even though investors use P/E ratio to compare between multiple shares, in many cases one question arise. Should the P/E ratio be lower or higher than the average market in order to incentive investors buy shares in a specific company?

For example, considering two companies: one with a stock price per share of $50 and with a P/E ratio of 60; and a second corporation with a stock price per share of $80 but with a P/E ratio of 10; we may state that the first company’s shares are more “expensive” than the shares of the second one, but the analysis should be a bit more complex than simply comparing the 2 figures given above and should take into account as well the growth rates the two companies had within the last few years and which are the peculiarities of the industries the two companies operate in.

Generally speaking, a high P/E indicates that investors are expecting higher earnings growth in the coming period, while in case of a lower P/E ratio there is a signal of skepticism in this regard.

What else you need to know about the price earnings ratio

- Considering the historical data available the average P/E ratio in the market is considered to be between 15-25.

- There are differences in regard of the P/E ratio optimal levels as it is industry specific.

- When inflation increases the P/E ratios are generally lower than when inflation is low.

- Don’t make decisions whether to buy or sell shares by the P/E ratio only.

- A better way of interpreting the P/E ratio is by assessing the industry peculiarities and the future growth prospects a company has too.

How to calculate the price earnings ratio?

Either you do it by hand or by using this PE ratio calculator, as explained above basically there are required two values that should be given:

- Current market share price which can be obtained from stock exchange sites, Yahoo Finance, Google Finance or any financial centre stock exchange website. Please remember that there are variations of the PE ratio since the current share price can be considered an average of the last 7 days, 30 days, last quarter or last year, depending on the time horizon it is preferred.
- Earnings per share officially reported by the company in question which can usually found within the financial reports it publicly releases.