--%>

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 : Describe who owns a credit union

    Describe who owns a credit union? Credit unions are owned through their members. While credit union members put money in their credit union, they are not "depositing" the money technically.  In spite of, they are purchasing shares of the cr

  • Q : Explain Financial Models Financial

    Financial Models: A model which symbolizes the financial statements or financial operations of a company in terms of its business parameters and forecasts future financial performance. Models are employed for risk management by examining various econo

  • Q : Explain Budget Cycle Budget Cycle : The

    Budget Cycle: The time period needed to made a state financial plan and enacts that part of it applying to the budget year. The Significant events in the cycle comprise: • The preparation of G

  • Q : What is Shared Revenue Shared Revenue:

    Shared Revenue: It is a state-imposed tax, like the gasoline tax, that is shared with the local governments in proportion, or significantly in proportion, to the amount of tax collected or generated in each local unit. The tax might be collected eithe

  • Q : Describe risks related with using

    Describe risks related with using a large amount of short-term financing for working capital? By using a large amount of short-term financing usually allows funds to be raised at a lower cost however raise the firm's risk.

  • Q : Explain Transfers Transfers : As

    Transfers: As employed in Schedule 10Rs and fund situation statements, transfers replicate the movement of resources from one fund to the other based on statutory authorization or particular legislative transfer appropriation authority.

  • Q : Question-total level of employment and

    Normal 0 false false

  • Q : Purchasing power parity of US and

    Under what condition would the U.S. dollar and the Canadian dollar said to be have achieved purchasing power parity? The U.S. dollar and the Canadian dollar would be assumed to have achieved purchasing power parity while the exchange rate reflec

  • Q : Describe the role of a broker in

    Describe the role of a broker within security transactions? How are brokers compensated?Brokers handle orders to purchase or sell securities. Brokers are agents who work in support of an investor. While investors call with an order, brokers work

  • Q : Question on level of free market wage

    In the year of 1996, the U.S. Congress raised the minimum wage from $4.25 per hour to $5.15 per hour. Some of the people suggested that a government subsidy could help employers finance the higher wage. Assume the supply of low-skilled labour is specified by