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 ?
Unless long-term interest rates drop further, aggregate price-to-earnings ratios are about as high as they can possibly be.
AT&T trades at a price-to-earnings ratio of about eight times the analyst's revised 2019 outlook and at a dividend yield of about 6.7%.
Analysts also noted it will boost Apple's earnings per share by 9 percent with a price-to-earnings ratio of 14.3.
He said the market would likely tolerate a price-to-earnings ratio of 17x this year, which means they will pay 17 times the amount of money the marker will make this 2013.
The affordability of a home in UK cities is at its worst level since the average house price-to-earnings ratio increased to 7.2 at the height of the last boom in 2008.
According to the company, the new target price of RM1.52 was based on 14 times price-to-earnings ratio (PER) over earnings per share for FY16.
The stock recently sported a price-to-earnings ratio near 18, and a forward-looking one near 14, both well below its five-year average of 20.
Robert Shiller's Cyclically Adjusted Price-to-Earnings ratio (CAPE), which takes the moving average of 10 years' worth of earnings and adjusts them for inflation, is around 30 times for the S&P 500.
With the Dow and the S&P 500 in record territory and an S&P 500 price-to-earnings ratio of 15.6, the highest in nine years, a substantial break to the upside on earnings would be a welcome development for investors.
However, now that CCA stock is nearing a five-year low, the stock becomes enticing for investors as the company tempts at FY 2014 dividend yield of 5.1 per cent and a price-to-earnings ratio of 16.1.
A price-to-earnings ratio of 20.22x means investors are paying about 20 times the amount of money they expect to make from the market.
When I say the group, I am referring to the aggregated average price-to-earnings ratio for all the stocks in the industry the company operates in.