How do you calculate the P/E ratio?

A company's price-to-earnings ratio (P/E) measures the value of its shares in relation to its earnings. Calculating the P/E ratio is not complex. By using the following formula, you can easily calculate the P/E ratio of any company:

Current share price/earnings per share = P/E ratio

Imagine Company Alpha is priced at $30 while its earnings per share amount to $5. When you insert these numbers into the formula, the result is a P/E of 6. While there are more complicated calculations, this is all you need to get started. Also, most websites will include this number with the stock. Now, let us take a moment to look at the two sides of the equation.

Calculating P/E Ratio
What is a good P/E Ratio?

A low P/E ratio is often associated with stock being cheap (at least on paper), however, this may not always be the case.

A low P/E could be the result of temporarily high earnings driven by one-off factors (e.g. recent sales of assets) or an unsustainable earnings path (e.g. number of face masks sold during the height of the pandemic).

Even worse, the company might face a secular decline. Think of DVD rental stores that might have appeared cheap on past earnings some time ago but those earnings went to zero in a very short time.

To avoid such mishaps, it's best to check the forward P/E ratio, which reflects what analysts expect on the basis of a projected earnings trajectory. A word of advice: when making an investment decision, consider other metrics besides the P/E ratio as explained in our article on using the P/E ratio to invest.

Author of this article

Jake Asmah

Author of this article

Jake has a year of experience working in freelancing and content writing. Currently, he studies Sociology learning to understand people, as he improves upon his writing craft. Living in Hungary has given him much experience he will take to the world.

Jake Asmah

Intern Content Editor

Jake has a year of experience working in freelancing and content writing. Currently, he studies Sociology learning to understand people, as he improves upon his writing craft. Living in Hungary has given him much experience he will take to the world.

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