1. What is Price to Earnings Ratio?

The Price to Earnings (P/E) Ratio is a valuation metric that compares a company's stock price to its earnings per share. It helps investors assess whether a stock is overvalued or undervalued relative to its earnings.

2. How Does the Calculator Work?

The calculator uses the P/E ratio formula:

Where:

• \( Market Price per Share \) — Current trading price of one share
• \( Earnings per Share (EPS) \) — Company's net income divided by outstanding shares

Explanation: The ratio shows how much investors are willing to pay per dollar of earnings. A higher P/E suggests higher growth expectations.

3. Importance of P/E Ratio

Details: P/E ratio is crucial for comparing companies within the same industry, assessing market expectations, and identifying potentially overvalued or undervalued stocks.

4. Using the Calculator

Tips: Enter the current market price per share and the company's most recent earnings per share (EPS). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good P/E ratio?
A: There's no single "good" ratio. Typically, ratios are compared within industries. The S&P 500 average is about 15-20 historically.

Q2: What does a high P/E ratio indicate?
A: High P/E may indicate growth expectations, but could also signal overvaluation. Low P/E may suggest undervaluation or financial troubles.

Q3: What are limitations of P/E ratio?
A: Doesn't account for growth rates, debt levels, or industry differences. Can be distorted by accounting practices and one-time items.

Q4: Should I use trailing or forward P/E?
A: Trailing P/E uses actual earnings, while forward P/E uses estimates. Both have value but serve different purposes.

Q5: How does P/E differ across industries?
A: High-growth industries (tech) typically have higher P/Es than stable industries (utilities). Always compare within sectors.