The priceearnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate profits, providing investors with a sense of a stockâ€™s value. To calculate a companyâ€™s P/E ratio, use the following formula:
P/E ratio = price per share / earnings per share (EPS)
Where EPS = earnings/total shares outstanding
As long as a company has positive earnings, the P/E ratio is calculated this way (a company with no earnings, or one which is losing money, has no P/E ratio). The stock price per share is set by the stock market, and the earnings per share value will vary, depending on the companyâ€™s financials and which earnings variant is used. Typically, EPS is taken from the last four quarters (trailing P/E; referred to as TTM for trailing twelve months), but it can also be taken from the estimates of earnings expected over the next four quarters (forward P/E) or some other variation. As a result, a company will have more than one P/E ratio, and investors must be careful to compare the same P/E ratio when evaluating different stocks.
To determine the P/E ratio, investors can divide the stock price by EPS. For example, CocaCola Co (KO) on June 18, 2014 traded at $41.56 per share with an EPS (TTM) of $1.87, so the P/E ratio would be:
 Stock price ($41.56) / earnings per share ($1.87) = 22.22
This essentially means that investors are willing to pay $22.22 for every dollar of earnings that KO has. For comparison, Pepsico Inc (PEP) on the same day traded at $88.90 per share with an EPS (TTM) of $4.43 and a P/E ratio of 20.31. The average P/E ratio for companies in the Beverage sector is about 20.26, and, historically, the average P/E ratio for the broad market has been around 15. KO, therefore, has a higher P/E ratio than both the sector and broad market average, as well one of its competitors, PEP. This higher P/E ratio might mean that investors will expect higher earnings growth in the future compared to the overall market. The P/E ratio is only one valuation measure, however, and investors would have to dig deeper before making any investment decisions.

What does the forward p/e indicate about a company?
Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >> 
How can the pricetoearnings (P/E) ratio mislead investors?
A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >> 
Stocks with high P/E ratios can be overpriced. Is a stock with a lower P/E always ...
The short answer? No. The long answer? It depends.The pricetoearnings ratio (P/E ratio) is calculated as a stock's current ... Read Answer >> 
What is the average pricetoearnings ratio in the banking sector?
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What is an alternative ratio to forward p/e?
Discover the most commonly used alternative equity evaluation ratio to the forward P/E ratio, and the relative advantages ... Read Answer >> 
What's the difference between absolute P/E ratio and relative P/E ratio?
The simple answer to this question is that absolute P/E, which is the most quoted of the two ratios, is the price of a stock ... Read Answer >>

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