Price to Earnings (P/E) Ratio

A formula used to ascertain the value of a company. This formula contrasts market value per share relative to per-share earnings. Also referred to as a “earnings multiple” or “price multiple.”

There are times when it makes sense to compare shares issued by different companies in an apples-to-apples as opposed to an apples-to-oranges kind of way. Investment strategy usually takes a great deal of context into account, but sometimes it is all about the numbers. P/E ratio helps investors to assess the value of a company in an “all about the numbers” manner. Similarly, comparing P/E ratios of a single company over time can help to place a current P/E ratio in historical context.

 

EXAMPLE:

Executive: “Our Price to Earnings Ratio is fabulous right now. It not only looks better than our competitors, it looks better than the same ratio applied 12 months ago. Our company value is trending strong. Isn’t that great?”

Friend: “Did you just use the word ‘fabulous’ in a sentence?”