Financial modelling terms explained

# Price To Earnings Ratio

The price to earnings ratio of a company determines the market price of one share of the company's stock relative to the company's earnings per share. The P/E ratio is a commonly used valuation measure for stocks.

## What Is a P/E Ratio?

The P/E ratio (price-to-earnings ratio) is a measure of the price of a stock compared to the earnings of that stock. It is calculated by dividing the price of the stock by the earnings per share (EPS) of the stock. The P/E ratio is used to determine how expensive a stock is. A high P/E ratio means that the stock is expensive, while a low P/E ratio means that the stock is cheap. The P/E ratio can also be used to compare the value of different stocks.

## How Do You Calculate a P/E Ratio?

The P/E ratio is a valuation metric used to measure the price of a company's stock against its earnings. The ratio is calculated by dividing the stock price by the company's earnings per share (EPS). The P/E ratio can be used to estimate how much investors are willing to pay for each dollar of the company's earnings.

## What Is the Difference Between a P/E Ratio and a P/B Ratio?

The price-to-earnings (P/E) ratio is a measure of the price of a company's stock relative to the company's earnings per share. The price-to-book (P/B) ratio is a measure of the price of a company's stock relative to the company's book value per share. The P/E ratio is typically higher than the P/B ratio. This is because the P/E ratio includes the value of a company's future earnings, while the P/B ratio does not.

## What is an Example of P/E Ratio?

The P/E ratio, or price to earnings ratio, is a metric used to value a company's stock. It is calculated by dividing the company's stock price by its earnings per share. This metric is used to compare a company's stock price to its earnings. A high P/E ratio means that the company's stock is expensive, and a low P/E ratio means that the company's stock is cheap.

An example of a P/E ratio calculation would be if a company's stock is trading at \$100 per share and its earnings per share are \$10, then the P/E ratio would be 10 (100/10). This would mean that the company's stock is expensive because the P/E ratio is greater than 1. Conversely, if a company's stock is trading at \$10 per share and its earnings per share are \$1, then the P/E ratio would be 10 (10/1). This would mean that the company's stock is cheap because the P/E ratio is less than 1.

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