Price Earnings Ratio or P/E ratio Definition, Formula and Example

Price Earnings Ratio also called as P/E ratio or Price to Earnings Ratio is a ratio which is used to calculate the market value of stock relative to earnings by comparing the market value price per share by the earnings per share. Price Earnings Ratio represents what the market is ready to pay for the stocks as per the companies current earnings.Fair market value of a stock is based on more than just predicted future earnings. Investor speculation and demand also help increase a share’s price over time.

Investors use P/E ratio for evaluating companies stock market value should be by predicting future earnings per share.  PE Ratio helps the investors to analyse how much should pay for a stock based on its current earnings. Investors use Price Earning Ratio for deciding what multiple of earnings a share is worth 

Formula for Price Earnings Ratio

Price Earnings Ratio Formula is calculated by dividing market value price per share by the earnings per share.

Price Earnings Ratio = (Market Value Price Per Share) / (Earnings Per Share).

How to calculate Price Earnings Ratio?

For calculating the companies Price Earnings Ratio, the below metrics are required.

  1. Market Value Price Per Share:Market Value Per Share formula is equal to total value of company divided by the number of shares. The formula for market value price per share= Total Value of Company / Number of Shares.
  2. Earnings Per Share: Earnings Per Share can be calculated by dividing Net Income by Average Outstanding Shares. The formula for calculating Earnings per share= Net Income / Average Outstanding Shares. 
  3. Finally, after getting the details of Market Value Price Per Share and Earnings Per Share. Now calculate Price Earnings Ratio by dividing market value price per share by the earnings per share.

Price Earnings Ratio Calculation : (Market Value Price Per Share) / (Earnings Per Share).

Price Earnings Ratio Example

InvestSahi stock is currently trading at INR.100 per share, InvestSahi earnings per share is INR.10. InvestSahi P/E ratio would be calculated like this:

The P/E ratio of InvestSahi is as below

Price Earnings Ratio Calculation : (Market Value Price Per Share) / (Earnings Per Share).

Market Value Price Per Share = INR100

Earnings Per Share=INR10

InvestSahi P/E ratio = 100 /10 = 10

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