Price-Earnings Ratio Calculator

More about the Price-to-Earnings Ratio so you can better use the results provided by this solver.

How do compute the PE ratio?

The Price-Earnings Ratio \((PE)\) is the ratio of price per share to earnings per share . This ratio is a market value measure, and it indicates how many dollars investors are willing to pay for a share of the firm, for each $1 in current earnings.

The P/E formula

First, we compute the EPS using the formula below:

\[ \text{EPS} = \displaystyle \frac{\text{Net Income}}{\text{Number Shares Outstanding}}\]

Now, once the earnings-per-share are already calculated, we can compute the price-to-earnings ratio as follows:

\[ \text{PE} = \displaystyle \frac{\text{Price per share}}{\text{Earnings per share}}\]

Example of the calculation of the Price-Earnings Ratio

Question: Suppose that a firm has a net income of $40,000, with 2000 shares outstanding, and the price per share is $180. Compute the price-earnings ratio for this firm.

Solution:

This is the information we have been provided with:

Net Income =	\(40000\)
Number of Shares outstanding =	\(2000\)
Price per Share =	\(180\)

First, we compute the earnings per share \((EPS)\) using the following formula:

\[ \begin{array}{ccl} EPS & = & \displaystyle \frac{\text{Net Income}}{\text{Number of Shares Outstanding}} \\\\ \\\\ & = & \displaystyle \frac{\text{\textdollar}40000}{2000} \\\\ \\\\ & = & 20 \end{array} \]

Now that we have computed the the earnings per share \((EPS = 20)\) we can compute the price-to-earnings ratio using the following formula:

\[ \begin{array}{ccl} PE & = & \displaystyle \frac{\text{Price Per Share}}{\text{Earnings Per Share}} \\\\ \\\\ & = & \displaystyle \frac{\text{\textdollar}180}{\text{\textdollar}20} \\\\ \\\\ & = & 9 \end{array} \]

Therefore, the price-to-earnings ratio for the given net income of \(\text{\textdollar}40000\), shares outstanding equal to \(2000\), and price per share of \(\text{\textdollar}180\) is \(PE = 9\). This means investors are willing to pay \(\text{\textdollar}9\) for each $1 in current income.