**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

-----------

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.