P E Ratio
The relationship of the price of the stock in relation to EPS
is expressed as the Price to Earnings Ratio or P / E Ratio. Investors often
refer to the P / E Ratio as a rough indicator of value for a company. A high P /
E Ratio would imply that investors are very optimistic (bullish) about the
future of the company since the price (which reflects market value) is selling
for well above current earnings. A low P / E Ratio would imply that investors
view the company's future as poor and thus, the price the company sells for is
relatively low when compared to its earnings. The P / E Ratio is calculated as
follows:
Price of Stock /
Earnings per Share *
* Earnings per Share are fully diluted to reflect the
conversion of securities into common stock.
EXAMPLE -
Earnings per share is $ 3.00 and the stock is selling for $ 36.00 per share. The
P / E Ratio is $ 36 / $ 3 or 12. The company is selling for 12 times earnings.
