--%>

Price Earning ratio

Define the term Price Earning ratio and how it is calculated?

E

Expert

Verified

Price Earning ratio:

Price earnings ratio commonly known as P/E ratio helps in the assessment of the company’s current share price in relation to its earnings.

It is calculated as:-

1765_earning ratio.jpg

We can say MPS÷EPS of the stock of the company.

The P/E ratio can be calculated for the past year as well as for the future years. In both the situations the market price remains as the current stock price of the company. Earnings shall vary w.r.t the year – actual earnings or the projected earnings as the case may be.

Example: if the company is trading at 60$ and the earnings of the last 12 months were 2$ then per share then the P/E ratio is 30.

Interpretation:

• The ratio reflects the price being paid by the market for each rupee of reported EPS. The ratio shall measure the expectations of the market and the investors. It shall depict the performance of the firm in the industry.

• Shares which have high growth rate shall have high P/E ratio since investors are ready to pay more for them. But if the risk factor in the share increases the market price of the share gets affected adversely and so is the P/E ratio of the firm.

• From the investment point of view of the investor the ratio shall help in deciding whether:-

-To purchase the shares of the firm or
-To refrain from purchasing the shares.

   Related Questions in Finance Basics

  • Q : Question based on imposesing tax Given

    Given equations describe market for widgets                         Demand: P = 10 - Q Supply: P = Q - 4

    Q : Describe EU Normal 0 false false false

    Normal 0 false false

  • Q : Why do focusing on cash flows rather

    Why do we focus on cash flows rather than profits while evaluating proposed capital budgeting projects? We targeted on cash flows instead of profits while evaluating proposed capital budgeting projects since it is cash flow that changes the valu

  • Q : Explain the term Balance Available

    Explain the term Balance Available: In regards to a fund, it is the surplus of resources over uses. For budgeting aims, the balance accessible in a fund condition is the carry-in balance, net of any preceding year adjustments, plus revenues and transf

  • Q : Define Reversion Reversion : The return

    Reversion: The return of the unused part of an appropriation to the fund from which the appropriation was made, usually two years (that is, four years for federal funds) after the last day of an appropriation’s accessibility period. The Budget A

  • Q : Surpluses drive prices up- shortages

    Normal 0 false false

  • Q : Describe the primary variables in EOQ

    Describe the primary variables being balanced in the EOQ inventory model? Clarify In the EOQ model the primary variables being balanced are carrying costs and ordering costs. The more frequent orders are placed the lower the firm's carrying co

  • Q : Present value influenced by change in

    Normal 0 false false

  • Q : Describe the benefits of paying late

    Describe the benefits of "paying late" (but not too late) and how do companies try to do this? Since money has time value, the later cash is paid, but not too late, the better. Companies employ remote disbursement banks to facilitate holding at

  • Q : Demand for French euros or a supply of

    Normal 0 false false