P/E Ratio, Price to earning ratio, Definition, Formula, Example

What is P/E, Price to Earnings Ratio (Definition)

The price-to-earnings ratio is a simple valuation indicator that determines how a company is valued in comparison with its earnings.

  • Stocks with lower P/E ratios are considered undervalued stocks and could offer higher returns.
  • Stocks with higher P/E ratios are considered overvalued stocks and could not offer higher returns.

P/E, Price to Earnings Ratio Formula

The P/E ratio is calculated by dividing current market price of a share divided by its earnings.

pe ratio formula

Limitations of PE, Price to Earning Ratio

Types of P/E, Price to Earnings Ratio

There are two types of P/E (Price to earning) ratio.

  1. Forward P/E ratio
  2. Trailing P/E ratio

What is Forward P/E ratio

What is Trailing P/E ratio