Quick Definition
Provides a quick way to value a company, measuring how expensive the stock may be.
Price to Earnings Ratio Formula
Explanation of Price to Earnings Ratio
Also called the PE or P/E ratio, the Price to Earnings Ratio compares the
Market Price of Common Stock to the
Earnings per Share. This ratio is a quick measure of how "expensive" the stock of a company may be.
Importance of Price to Earnings Ratio
A company's stock may be heard as being "overvalued" - this ratio is the calculation often behind analyses like that. As the Earnings per Share increases, or the Market Price of Common Stock decrease, the ratio will look better.
