Price/Earnings (P/E) Ratio

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Price/Earnings (P/E) Ratio

The Price/Earnings Ratio, or P/E Ratio, is a popular valuation measure for listed companies. It is often used as a measure of how ‘cheap’ or ‘expensive’ a stock is in relation to another benchmark, such as an index or industry comparison.

What the ratio measures is the number of times the stock price covers the EPS of a company. Or to put it another way, how many years of earnings (indicated by EPS) would be required to reach the level of the stock price.

Since earnings and EPS is closely linked to stock price value, the P/E Ratio can be regarded as a measure of value (cheap or expensive) because in theory it measures how much investors are willing to pay for a given level of EPS, i.e. “this stock is cheap because I only have to pay 4 times its EPS” or “this stock is expensive because I am paying 50 times its EPS”.

How accurate this ‘value’ application of the P/E Ratio is debated by different analysts and fund managers and depends on individual valuation theories. But what is not debatable is its widespread popularity as one of the most quick and simple references to value.

The P/E Ratio is given as a normal number normally with a decimal place or two. What the number means, for example 7.4, is that the stock price is 7.4 times the EPS. Or that it will take 7.4 years of earnings (given constant annual EPS) to match the stock price (arguably what you pay for the earnings).

Price/Earnings (P/E) Ratio Calculator

The calculator asks for:
Stock Price, this is found in the financial media or via your broker.
Earnings per Share (EPS), which is found via company announcements, the financial media or can be calculated via our EPS calculator.

Stock Price ($):

Earnings per Share [EPS] ($):


Price/Earnings (P/E) Ratio:




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