What is the 'Price-Earnings Ratio - P/E Ratio'?

Modified on Thu, 19 Jul 2018 at 09:16 AM

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple. 

The P/E ratio can be calculated as: Market Value per Share / Earnings per Share

BREAKING DOWN 'Price-Earnings Ratio - P/E Ratio'

In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

[ Price-earnings ratios are the most popular way to assign a relative value to a stock, but there are many other techniques that investors use to make decisions. If you're interested in learning more about investing, Investopedia's Investing for Beginners Course provides an in-depth introduction to the topic guided by a Chartered Financial Analyst. You'll learn the basics, how to manage your portfolio, techniques for reducing risk, and how to make informed decisions in over 75 lessons containing on-demand video, exercises, and interactive content. ]

Source: Investopedia

Was this article helpful?

That’s Great!

Thank you for your feedback

Sorry! We couldn't be helpful

Thank you for your feedback

Let us know how can we improve this article!

Select atleast one of the reasons
CAPTCHA verification is required.

Feedback sent

We appreciate your effort and will try to fix the article