Price Earning Ratio (P/E RATIO) and EPS
The Price Earning Ratio (P/E RATIO)
What is the Price Earning Ratio?
A price earning ratio, or "P/E" for short, is a commonly used way to simplistically value a company (determine what a company's stock should be worth). It is simply a company's stock price divided by a company's earnings per share. The price to earnings ratio, also known as "P/E", is calculated by dividing the company's stock price by the company's earnings per share, or "EPS".
Stock Price
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EPS
The P/E ratio gives you an indication of how many times you are paying for a company's stock verse a company's earnings. P/E ratios can be used to compare against other companies, or against a company's own historical P/E ratio. It is believed by some that a company with a high (large) P/E ratio is expensive verse a company with a low P/E ratio, since with a high P/E ratio you are paying a larger multiple verse a company's earnings.
Higher P/E ratio's are often associated with "growth stocks", or companies that are growing faster than average. The reason why some companies have a high P/E is because investors believe that the company's earnings will be higher in the future. P/E ratios can not be applied to companies without any earnings. For these companies, other ratios or valuation techniques need to be used.
What is EPS or Earnings per share?
EPS, as it is called, is a company's profit divided by its number of shares outstanding.