# Price-to-earnings ratio

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Related to Price-to-earnings ratio: Price Per Share

## Price-Earnings Ratio

The price of a security per share at a given time divided by its annual earnings per share. Often, the earnings used are trailing 12 month earnings, but some analysts use other forms. The P/E ratio is a way to help determine a security's stock valuation, that is, the fair value of a stock in a perfect market. It is also a measure of expected, but not realized, growth. Companies expected to announce higher earnings usually have a higher P/E ratio, while companies expected to announce lower earnings usually have a lower P/E ratio. See also: PEG

## Price-to-earnings ratio (P/E).

The price-to-earnings ratio (P/E) is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share.

A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power.

For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. If earnings falter, there is usually a sell-off, which drives the price down. But if the company is successful, the share price and the P/E can climb even higher.

Similarly, a low P/E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Conversely, a low P/E can be a clue that the market considers the company a poor investment risk.

Stocks with higher P/Es are typical of companies that are expected to grow rapidly in value. They're often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations.

The P/E can be calculated two ways. A trailing P/E, the figure reported in newspaper stock tables, uses earnings for the last four quarters. A forward P/E generally uses earnings for the past two quarters and an analyst's projection for the coming two.

References in periodicals archive ?
Expense levels significantly affect a company's price-to-earnings ratio.
Textron's stock price appeals, with its recent price-to-earnings ratio near 20 and its forward-looking P/E ratio near 15.
NORTHUMBERLAND is the second most affordable district to live in the UK for first-time buyers with a price-to-earnings ratio of 2.
A stock's fundamentals, such as its price-to-earnings ratio, market position, management, estimated earnings growth, and dividends were also taken into consideration.
AN INVESTOR WHO IS WILLING TO follow the value school of investing should consider eight factors in selecting securities (or mutual funds), including price-to-earnings ratio, price-to-cash flow ratio, price-to-book value ratio, dividend yield, private market value, adjusted net working capital, insider buying and stock repurchases.
Its forward-looking price-to-earnings ratio is 11, well below its five-year average of 15.
There have been upgrades to analysts'' earnings expectations for the third consecutive month, leaving estimates for earnings growth for the MSCI World next year at a healthy 26%, which translates into a price-to-earnings ratio of 14.
CBS stock was recently trading with a price-to-earnings ratio of just 10.

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