Navigating the world of stock investments involves understanding various financial indicators. One vital term is the 'Price/Earnings ratio', or 'P/E ratio'. But what is this, and how is it used in stock evaluation? This guide will help you comprehend the P/E ratio, complete with a mathematical explanation and a example. What is the Price/Earnings Ratio? The P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings (EPS). Investors use it to analyze the relative value of a company's shares within the same sector or industry. Calculating the P/E Ratio The P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS). It's a simple formula: P/E Ratio = Market Value per Share / Earnings per Share (EPS) This figure indicates what the market is willing to pay for a company's earnings. The P/E Ratio in Stock Evaluation The P/E ratio is an essential tool in stock analysis. A high P/E rat...