price/earnings
ratio. The most common
measure of how expensive a
stock is. The P/E ratio is equal to a
stock's market capitalization divided by its
after-tax earnings over a 12-month
period, usually the
trailing period but occasionally the
current or
forward period. The
value is the same whether the calculation is done for the whole
company or on a per-share basis. For example, the P/E ratio of company A with a
share price of $10 and
earnings per share of $2 is 5. The higher the P/E ratio, the more the
market is willing to
pay for each dollar of
annual earnings.
Companies with
high P/E ratios are more likely to be considered "risky"
investments than those with
low P/E
ratios, since a high P/E ratio signifies high
expectations. Comparing P/E ratios is most valuable for companies within the same
industry. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be
estimates, but in each case, the "P" in the equation is the current
price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all.
also called earnings multiple.
