The price-earnings ratio (P/E ratio) is a measure of the price paid for a share relative to the annual income or profit earned by the company. It is calculated by dividing the share price by the company's earnings per share (EPS). The higher the P/E ratio, the more expensive the share price is, relative to the earnings of the company.
The price-earnings ratio is calculated by dividing the share price by the earnings per share.
The P/E ratio tells us how much investors are willing to pay for each dollar of a company's earnings. A high P/E ratio means that investors are willing to pay a higher price for each dollar of earnings, while a low P/E ratio means that investors are willing to pay a lower price for each dollar of earnings.
The P/E ratio can be used to compare the relative value of shares of different companies. It can also be used to compare the relative value of shares of the same company at different times.
The P/E ratio has a number of limitations. First, it tells us only how much investors are willing to pay for each dollar of earnings. It does not tell us whether the shares are actually undervalued or overvalued.
Second, the P/E ratio does not take into account the company's growth prospects. A company with high growth prospects may have a high P/E ratio even if its shares are undervalued.
Third, the P/E ratio is affected by accounting choices. For example, a company can choose to report a higher EPS figure by including one-time events such as asset sales.
Finally, the P/E ratio does not tell us anything about the company's dividend policy or its financial health.
A high P/E ratio means that investors are willing to pay a higher price for each dollar of earnings. This may be because the company has high growth prospects, or the shares may simply be overvalued. A low P/E ratio means that investors are willing to pay a lower price for each dollar of earnings. This may be because the company has low growth prospects, or the shares may be undervalued.