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Price to Earnings Ratio

Discussion in 'Investing Glossary' started by Glossary, 24th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006

    The Price Earnings or P/E Ratio is probably the most used financial ratio used to analyse and compare companies.

    The calculation is as follows:

    P/E Ratio = market price / earnings per share

    The P/E Ratio is basically the number of years based on current earnings that it will take for a share to pay for itself. Also sometimes referred to as the earnings multiple.

    An abnormally high or low P/E relative to peer companies will indicate either typically that the company is over or underpriced by the market, respectively.

    Whilst it is the most commonly quoted financial ratios it has weaknesses. Firstly, the earnings figures used are usually past earnings. To overcome this problem, prospective PERs are sometimes used by analysts. The problem with prospective PE ratios is that forecast earnings are almost certainly wrong. In reality the earnings are quite unlikely to exactly match the forecast.

    Also known as:
    • P/E Ratio
    • PER