Price to earning ratio

Or PE , is one of a large family of valuation ratios which are intended to help investors make sound decisions.

The fundamental concept of PE ratios is that the shares of companies in the same industry should, in the absence of easily understood reasons to the contrary, trade for roughly the same price.

Intuitively this make sense. Consider for example two computer software services firms, with roughly identical financial details; that is, earnings, outstanding debt, sales, etc.

An astute investor, using PE , might notice that the market was undervaluing one firm, or perhaps overvaluing the other.

Price to earnings can be calculated by dividing a company's market cap by its total earnings, or else dividing its share price by its earnings per share (EPS).

A final but perhaps obvious note about PE ratios; this is a meaningless concept for firms without earnings.

In this case investors must turn to other valuation ratios such as Price to book or Price to sales.
The Price to Earnings Ratio (also known as PER and P/E Ratio) is calculated as the price of a share divided by the Earnings per Share (aka EPS). The price to earnings ratio is the inverse of earnings yield.

For example, suppose that company XYZ has a market price of 210 cents per share, and earnings per share of 15 cents per share, the PER would be:
	PER = PRICE / EPS
	    = 210   / 15
	    = 14
A lower PER is better, cet. par.

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