Price Earnings Calculator
**This is a basic calculator and does not accept commas. When entering values, just enter the numbers.
Price/Earnings Formula
Price/Earnings Ratio =
Common Stock Price per Share / Earnings per Share
** Visit Earnings per Share to learn how to calculate this value.
Common Stock Price per Share / Earnings per Share
What is Price/Earnings Ratio?
Price/Earnings Ratio, also referred to as P/E Ratio, is a measure of the market price of a share of stock compared to the earnings of a company. In simple terms, this ratio tells an investor how much he/she can expect to pay in order to receive $1 of the business earnings. For example, if common stock for a company is trading with a price/earnings of $18, then the market is saying they are willing to pay $18 for $1 of current earnings. This ratio is displayed in the Wall Street Journal, investment service providers (i.e. TD Ameritrade), and many other investment publications.
It is important to note that the P/E ratio is relative to an industry and where a particular business falls in comparison to that industry average. With this in mind, if a company has a high price earnings, an investor may consider it to be a growth stock. It is an indication that investors are willing to pay a premium for the stock due to anticipation of positive performance in the future; future earnings will grow. Alternatively, some investors may consider a high value to represent a stock that is overvalued (investors are paying more than the stock is worth). Investing in a stock with a high P/E is considered an investment that carries risk.
A stock that has a low P/E means the stock is priced below value, and this could represent an opportunity to buy at a discounted rate. Some investors see this opportunity and buy in, waiting for a market correction; when the price per share goes up. Then they sell for a profit.
Price Earnings Example
Shoeburger Corp shares are selling in the market for $50 per share, and ButterBurger Corp is trading at $30 per share. We could use the Price Earning Ratio to evaluate which stock is actually cheaper despite the price per share.
The first step is to look at the industry average, in this case the restaurant industry. The average stock pe ratio is 20. If Shoeburger reflects a P/E ratio of $18 and ButterBurger has a P/E of $32, Shoeburger Corp is actually the "cheaper" investment even though the price per share is much higher than ButterBurger. Not only is Shoeburger selling below the industry average, but you are able to pay less per each $1 of earnings that Shoeburger makes. However, if an investor is willing to accept risk, they may buy ButterBurger stock because the higher P/E implies investors are willing to pay a premium with an expectation that ButterBurger is going to perform really well in the future. It is important to note there are numerous finance and accounting ratios and measures to evaluate business performance and an investor should not rely on just one metric to make investment decisions. It requires taking numerous components into consideration.