
P/E Ratio: What Is It?
P/E is short for the ratio of a company's share price to its pershare earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS):
P/E Ratio =  Market Value per Share 
Earnings per Share (EPS) 
Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters.
There isn't a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise.
Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist.
Historically, the average P/E ratio in the market has been around 1525. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.


IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Profit and Loss Statement (P&L)
A financial statement that summarizes the revenues, costs and ... 
Percentage Change
Percentage change is a simple mathematical concept that represents ... 
Markdown
The difference between the highest current bid price among dealers ... 
Catalyst
A catalyst in equity markets is a revelation or event that propels ... 
Investing
The act of committing money or capital to an endeavor with the ...

How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...
The PEG ratio, or price/earnings to growth ratio, is a good tool for determining stock valuation when you need to make a ... Read Full Answer >> 
Is book value a better metric for company worth than the PE ratio?
Book value can be a better metric than the P/E, or price to earnings, ratio in certain circumstances, but a company’s true ... Read Full Answer >> 
When does a growth stock turn into a value opportunity?
A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >> 
What is finance?
"Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >> 
What is the 'Rule of 72'?
The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >> 
What is the formula for calculating EBITDA?
When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>