Price to Earnings Ratio
Ratio Review:
 What is a ratio?
 A relationship between two quantities,
normally expressed as the quotient of one
divided by the other: The ratio of 9 to 7 is
written 9:7 or 9/7.
Stock Review
 Stock is ownership in a company. The
price of the stock is constantly
changing.
 Each year a company reports on how
much it earns that year on a share of
stock.
Price to Earnings Ratio
To figure out the Price to Earnings Ratio,
divide the price of a stock by the
earnings per share.
Price of a stock
Earnings per share
Computing P/E Ratios:
 1st we need to know the price of the
stock.
 2nd we need to know the annual
earnings per share.
 3rd we divide the price of the stock by
the earnings.
Example: Apple (AAPL)
 Researching on the Internet we can
find the annual earnings per share of
Apple. It was $5.72 in October of 2009.
 Source - finance.yahoo.com
 The price of Apple stock changes,
which means the price to earnings ratio
will continually change.
Price To Earnings Ratio
COMPANY
SYMBOL
EARNINGS PRICE
PER SHARE #1
PRICE
#2
PRICE
#3
PRICE
#4
Apple:
AAPL
$5.72
$78.20
$115.23
$145.67
$190.55
78.20 ÷
5.72
= 13.67
115.23 ÷
5.72
= 20.15
145.67÷
5.72
=25.47
190.55 ÷
5.72
=33.31
What Else?
 What happens to the Price to Earnings
Ratios if only:
 The Stock Price Goes Higher?
 The P/E ratio goes higher.
 The Stock Price Goes Lower?
 The P/E ratio goes lower.
 The Earnings Go Higher?
 The P/E ratio goes lower.
 The Earnings Go Lower?
 The P/E ratio goes higher.
Understanding the Ratio
 What does a high P/E ratio mean?
 The stock price may be over-valued or the
company is growing rapidly.
 What does a low P/E ratio mean?
 The stock price may be under-valued or
the company is in a mature industry.
Understanding the Ratio
 Would you buy a stock with a high or low P/E ratio?
 “Stocks with higher forecast earnings growth will usually
have a higher P/E, and those expected to have lower
earnings growth will in most cases have a lower P/E.”
 “Investors can use the P/E ratio to compare the value of
stocks: if one stock has a P/E twice that of another stock,
all things being equal (especially the earnings growth
rate), it is a less attractive investment. Companies are
rarely equal, however, and comparisons between
industries, companies, and time periods may be
misleading.”

– Sources: http://en.wikipedia.org/wiki/P/E_ratio