Price to Earnings Ratio

The price to earnings ratio is the ratio that evaluates the shares produced by the company in the market. The price of earnings ratio is the ratio between the prices of each share to the earnings per share. The price of the share is the market value of the share that is currently floating in the market. In order to calculate the ratio you need to know the stock price of the company and the current earnings per share. The formula of Price to earnings ratio can be shown as under:-

Price to Earnings Ratio = Market Price per Share/ Earnings per Share

While calculating the PER we need to calculate the earnings per share of the company that is usually calculated for the last four financial quarters of the company. When the EPS is taken from the last quarters the ratio calculated is called trailing PER where as when EPS is expectedly projected for the future quarters the PER is called projected PER. The Price to Earnings ratio is usually calculated to find out the market value of the stock of a company and comparing it to the income that is generated by the company.

Most of the investors compare PER of different companies to make a decision regarding their final investment. The high PER shows that company is generating high income and is safe to invest where as the low PER value means that company is not paying enough profit to the investors. Generally for an average company the PER is 20-25 times of its total earnings.

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