Price to Earnings (P/E) Ratio Calculator
The P/E Ratio calculator calculates the price-to-earnings ratio and presents the result rounded off to 2 digits. Not only does this post calculate the price-to-earnings ratio accurately, but it also explains each component of the formula of PE Ratio. It also teaches how to interpret the results.
About Price to Earnings Ratio
Price to earnings ratio represents the value of a company in terms of the number of times of its current earnings. If the P/E ratio is 10, it means the market is willing to pay 10 times of its current earnings to invest in the company.
The formula that represents the P/E Ratio is as follows:
P/E Ratio = Market Price per Share / Earnings per Share
The market price is the current market price per share of a company in the stock market. This also suggests that this ratio is broadly used for listed entities. It is because finding a current market price of an unlisted company is difficult.
EPS is arrived at when the total net earnings of a company are divided by equity shares outstanding of the company.
P/E Ratio Interpretation
One important part of interpreting any financial ratio is to compare it with the company’s own past or with the industry it exists in.
High P/E Ratio
Companies already having a higher level of P/E ratio indicates two things.
- The market is seeing a very good future prospect for the company.
- From another angle, if the P/E is higher than its peers, it may be overpriced. New investors may be reluctant about entering into it.
Low P/E Ratio
If the company’s P/E ratio is low, the market may be discounting some bad news about the company. News that affects the future growth prospects of the company. If the company faces a temporary reduction in trading price owing to market fluctuation, it can be an investment opportunity. If the fundamentals of the company are good, accompanied by a low P/E ratio, it is an opportunity. It is based on the fact that the P/E Ratio of a company tends to move towards the industry average P/E Ratio.