What is the P/E Ratio?

The P/E ratio is calculated by dividing the current market price of a stock by its earnings per share (EPS):

P/E Ratio= Market Price per Share / Earnings per Share (EPS)


The P/E ratio allows you to look beyond the price of a stock to see which company could be the best value.

To create this ratio, first divide the net income, or earnings, by the number of outstanding shares.

This number is called earnings per share, or EPS.

Next, divide the price of the stock by the EPS to get the P/E ratio.

The first company is trading at $6 and has an EPS of $0.20, resulting in a P/E of 30.

The second company is trading at $35 a share and has an EPS of $1.40 for a P/E of 25.

The final company is trading at $132 per share and has an EPS of $3.90 for a P/E of 34.

Now, you can better compare each company by its P/E ratio.

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