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The price earnings ratio or P/E ratio has long been thought of as one of the most important factors to be used in evaluating a company's stock price. First made popular by Benjamin Graham, he declared the ratio as one of the quickest and most accurate ways to make value comparisons. The price to earnings ratio or P/E is a measure of the cost to acquire $1.00 of that company's earnings. For example, if a company is reporting profits of $3.00 and the stock is selling for $45.00 per share then the P/E ratio is 15.0. Stated another way, the investor is willing to pay $15.00 for each dollar of earnings. The calculation of price to earnings is therefore: Market Value per Share / Earnings per Share A variation of the price to earnings ratio is a measure called the forward P/E. This measure simply uses a company's or analysts' projected earnings for the next four quarters to calculate a forward P/E. |
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