Price Earnings Ratio ( PE Ratio )

Investment Formula Description

Price Earnings Ratio ( PE Ratio) is an indicator to measure investor's expectation on company future growth in earnings.

In general, if the price earnings ratio ( PE ratio ) or price to earnings ratio for a corporation is high, it means that the investors are expecting higher earnings growth for that corporation.If the price earnings ratio ( PE ratio ) or price earnings ratio for a corporation is low, it means that the investors are expecting lower earnings growth for that corporation. Besides, some investors will use this formula to measure whether a stock is 'expensive' or 'cheap'. If the company's price earnings ratio ( PE ratio ) or price to earnings ratio is higher than fixed deposit price earnings ratio, some investors will think this stock is 'expensive' in the sense that the investors need to pay more to buy the stock. Price earnings ratio ( PE ratio ) is sometimes referred to as multiply of the earning, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (PE) of 10, the interpretation is that an investor is willing to pay $10 for $1 of  current earnings.Some other investors will interpret in another way.If a stock has price earnings ratio of 10,it shows that if the investor invest in this share, he will need to use 10 year to earn back his capital. However, price earnings ratio ( PE ratio ) cannot be used alone to assess a stock as it is usually more useful to compare the price earnings ratio ( PE ratio ) of one corporation to other corporation in the same industry, to the market in general or against the corporation's own historical price earnings ratio ( PE ratio ).The investors can compare price earnings ratio ( PE ratio ) of a company to corporation price earnings ratio ( PE ratio ) within the same industry. It won't be accurate to compare corporation's price earnings ratio ( PE ratio ) with corporations in other industry as different industry may have different prospect and future growth.

Investment Formula

Price Earnings Ratio ( PE Ratio ) or price to earnings ratio = Stock Price / Earnings Per Share

Investment Formula Example

If Stock A share price is $1.2 and the earning per share for the past 12 month is $0.12
Price Earnings Ratio ( PE Ratio ) or price to earnings ratio = Stock Price / Earnings Per Share = 1.2/0.12=10.
The investor is willing to pay 10 dollar for 1 dollar earning and he need to take 10 year to earn back his capital.

The investor can use the same formula to calculate price earnings ratio ( PE ratio ) for Fixed Deposit. For instance, if fixed deposit interest for one year is 2.5%. If the investor invests $1000 fixed deposit, the investor will be able to get $25 interest.

Price Earnings Ratio ( P/E Ratio ) or price to earnings ratio = Stock Price / Earnings Per Share = 1000 / 25 = 40.

In this case, for stocks that have price earnings ratio ( PE ratio ) greater than 40, some investors will consider these stocks as ' expensive' stocks since it need to pay more money to get earnings that are less than Fixed Deposit.