DEFINITION of 'Price-Earnings Ratio - P/E Ratio'

A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as: Market Value per Share / Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E
ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the
next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the
next two quarters.
Also sometimes known as "price multiple" or "earnings multiple."
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower
P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company
to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful
for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility
company (low P/E) as each industry has much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a
company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current
earnings.
It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this
measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of
manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.
Things to Remember

Generally, a high P/E ratio means that investors are anticipating higher growth in the future.

The average market P/E ratio is 20-25 times earnings.

The P/E ratio can use estimated earnings to get the forward looking P/E ratio.

Companies that are losing money do not have a P/E ratio.

The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market prospect ratio that calculates the market value
of a stock relative to its earnings by comparing the market price per share by the earnings per share. In other words, the price earnings
ratio shows what the market is willing to pay for a stock based on its current earnings.
Investors often use this ratio to evaluate what a stock's fair market value should be by predicting future earnings per share. Companies
with higher future earnings are usually expected to issue higher dividends or have appreciating stock in the future.
Obviously, fair market value of a stock is based on more than just predicted future earnings. Investor speculation and demand also
help increase a share's price over time.
The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. This is why the price to
earnings ratio is often called a price multiple or earnings multiple. Investors use this ratio to decide what multiple of earnings a share
is worth. In other words, how many times earnings they are willing to pay.
Formula
The price earnings ratio formula is calculated by dividing the market value price per share by the earnings per share.

Analysis
The price to earnings ratio indicates the expected price of a share based on its earnings. As a company's earnings per share being to
rise, so does their market value per share. A company with a high P/E ratio usually indicated positive future performance and investors
are willing to pay more for this company's shares.
A company with a lower ratio, on the other hand, is usually an indication of poor current and future performance. This could prove to
be a poor investment.
In general, a higher ratio means that investors anticipate higher performance and growth in the future. It also means that companies
with losses have poor PE ratios.
An important thing to remember is that this ratio is only useful in comparing like companies in the same industry. Since this ratio is
based on the earnings per share calculation, management can easily manipulate it with specific accounting techniques.
Calculating Price to Earnings(P/E) Ratios: WIDGET
Suppose you are looking at buying WIDGET stock. Here are the facts:

The stock is selling at $20 per share.

Last year, WIDGET had earnings of $1 per share.

Analysts estimate the company will earn $2 per share this year.

P/E ratio based on past earnings is 20. Calculation: $20/$1 = 20.

P/E ratio based on projected earnings is 10. Calculation: $20/$2 = 10.

This means you are willing to pay $10 for every dollar of projected earnings. This is also referred to as paying 10x earnings, or
the stock is said to have "an earnings multiple of 10".
Discounted cash flow (DCF)
Future cash flows multiplied by discount factors to obtain present values.
Future, expected cash flows from a project or venture that have been adjusted to arrive at their present value. One uses the calculation
of discounted cash flows to determine whether a particular investment is likely to be profitable.
Also known as a present value analysis; an approach to analysis of an income-producing property by calculating the present value of a
future income stream with the use of a discount rate.The two most common methods are the internal rate of return method and the
present value method.
A valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow
projections and discounts them (most often by using the weighted average cost of capital method) to arrive at a present value, which is
used to evaluate the investment's potential. If the value arrived at through DCF analysis is higher than the current cost of the
investment, the opportunity may be a good one. It is calculated as follows:

DEFINITION of 'Book Value'

1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation.
2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.
3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges
and so on.
Also known as "net book value (NBV)" or "net asset value."
Book value is the accounting value of a firm. It has two main uses:
1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the
selling price less the book value is the capital gain (or loss) from the investment.

Book value refers to the total amount a company would be worth if it liquidated its assets and paid back all its liabilities.
Book value can also represent the value of a particular asset on the company's balance sheet after taking accumulated
depreciation into account.

Book value is calculated by taking a company's physical assets (including land, buildings, computers, etc.) and subtracting
out intangible assets (such as patents)and liabilities -- including preferred stock, debt, and accounts payable. The value left
after this calculation represents what the company is intrinsically worth.

Thus, book value is calculated:

Book value = total assets - intangible assets - liabilities

"Since book value represents the intrinsic net worth of a company, it is a helpful tool for invThe definition of book value on
InvestingAnswersestors wanting to determine if a company is underpriced or overpriced, which could indicate a potential time to
buy or sell. For instance, value investors search for companies trading for prices at or below book value (indicating a price-tobook ratio of less than 1.0), which implies the shares are selling for less than the company's actual worth."