Sample use (from
Globe&Mail):
The decline in Zynga’s price now makes it one of the cheapest social-media stocks. Its forward price-to-earnings ratio dipped below 20 Tuesday, per Standard & Poor’s CapitalIQ.
Definition (from
Investopedia):
A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:
Market Value per Share
Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiple".
Definition (from
Wikipedia):
In
stock trading, the
P/E ratio (
price-to-earnings ratio) of a
stock (also called its "P/E", or simply "multiple") is a measure of the price paid for a
share relative to the annual
Earnings per Share (EPS).
[2].
Unlike the
EV/EBITDA multiple which is
capital structure-neutral, the price-to-earnings ratio reflects the
capital structure of the company in question. The price-to-earnings ratio is a
financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is
more expensive compared to one with a lower P/E ratio. The P/E ratio can be seen as being expressed in
years,
[note 1] in the sense that it shows the number of years of earnings which would be required to pay back purchase price, ignoring inflation and time value of money. The P/E ratio also shows current investor demand for a company share. The
reciprocal of the P/E ratio is known as the
earnings yield.
[3] The earnings yield is an estimate of the expected return from holding the stock if we accept certain restrictive assumptions (a discussion of these assumptions can be found
here).
Multimedia (from
Youtube):
