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Price-Earnings Ratio (P/E ratio)

Understanding the Price-Earnings Ratio (P/E Ratio): Evaluating Stock Valuation

The Price-Earnings Ratio (P/E ratio) is a financial metric used to evaluate the valuation of a company's stock relative to its earnings per share (EPS). It is a widely used measure by investors to assess whether a stock is overvalued or undervalued compared to its earnings potential.

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


Suppose Company ABC has the following financial details:


  • Market Price per Share: $50

  • Earnings Per Share (EPS): $5


To calculate the Price-Earnings Ratio:


  1. Divide market price per share by EPS: 50/5=10

A P/E ratio of 10 indicates that investors are willing to pay $10 for every $1 of earnings generated by Company ABC. This suggests how investors perceive the company's growth potential and profitability.

Market Value Ratio

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