The message here is that, at current earnings, investors in TechCo will theoretically get their money back after 20 years. Let's also assume that TechCo's current share price is \$100, just like ACME in the prior example. In the world of investments, a company’s price-to-earnings ratio, or P/E ratio, is a measure of its stock price relative to its earnings. Often, the earnings used are trailing 12 month earnings, but some analysts use other forms. Price-Earnings Ratio - P/E Ratio: The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. Because the most recent earnings-per-share for TechCo is \$5, that means TechCo's P/E ratio is \$100/\$5 = 20. If you’re trying to determine whether a stock is a good investment, the P/E ratio can help you gauge the future direction of the stock and whether the price is, relatively speaking, high or low compared to the past or other companies in the same sector.
Solution: =\$50 / \$5 = 10. The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. Compute price earnings ratio. The price earnings ratio of the company is 10. Use of P/E ratio: P/E ratio is a very useful tool for financial forecasting. The Price Earnings Ratio (P/E Ratio) is the relationship between a company’s stock price and earnings per share (EPS) Earnings Per Share Formula (EPS) EPS is a financial ratio, which divides net earnings available to common shareholders by the average outstanding shares over … The P/E ratio is a way to help determine a security's stock valuation, that is, the fair value of a stock in a perfect market.It is also a measure of expected, but not realized, growth.

The price of a security per share at a given time divided by its annual earnings per share. It means the earnings per share of the company is covered 10 times by the market price of its share. In other words, \$1 of earnings has a market value of \$10. The price to earnings ratio is one of the most important numbers analysts look at to understand how the market values a stock.