Financial Math: P/E Ratio

Price-to-Earnings Ratio

A Common Stock Valuation Metric

A P/E ratio is the price of a single share of stock divided by annual earnings per share. It is a rough determination of how overpriced or underpriced a stock may be. It reflects the dollar price you are paying for each dollar of profit the company produces.

P/E Ratio = Price / Annual Earnings

For example, on July 23rd, 2006, Microsoft's stock price was $23.87. It had earned $1.26 per share in the last 12 months (ttm means trailing twelve months). Therefore, its P/E ratio is:

PE = 23.87/1.26 = 18.91

Often you will see the term "forward P/E" as opposed to "trailing P/E." A forward P/E is the ratio based on estimated earnings for the next year. You can compare the two ratios to get a very rough, quick gauge on the company's growth.

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