--%>

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 : Negative consequences of company

    Explain negative consequences of a company holding too much cash? A company holding too much cash would be giving up the chance to invest more in income generating assets

  • Q : Label equilibrium price P-equilibrium

    Normal 0 false false

  • Q : Describe Treasury bill Describe

    Describe Treasury bill? How risky is it?Treasury bills are short term debt instruments issued through the U.S. Treasury which are sold at a discount and pay face value at maturity.  They are very close to risk-free as they are backed throug

  • Q : Finance associated to the fields of

    How is finance associated to the fields of economics and accounting?

  • Q : Assignments i want to write final state

    i want to write final state report. My state is Texas.

  • Q : What do you mean by Authorized What do

    What do you mean by Authorized: Provided the force of law (example, by statute). For certain action or quantity to be authorized, it should be possible to recognize the enabling source and date of approval.

  • Q : Define Cash Basis of Accounting Cash

    Cash Basis of Accounting: The base of accounting in which expenditures and revenues are recorded whenever cash is received or distributed.

  • Q : How would the market price of a bond be

    All other things held constant, how would the market price of a bond be influenced if coupon interest payments were made semiannually rather than annually?Most of bonds issued in the United States pay interest semiannually (twice per year). Alo

  • Q : Cyclical unemployment Suppose that in a

    Suppose that in a specific year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Employ Okun's law to fin out the size of the GDP gap in percentage-point terms. If the nominal GDP is $500 billion in that year, how much ou

  • Q : What do you mean by Without Regard To

    What do you mean by Without Regard To Fiscal Year (WRTFY): Where an appropriation has no period of restriction on its accessibility.