What is a P/E ratio?

The P/E ratio (sometimes referred to simply as the “P/E”) is a company’s share price (the “P”) compared to its per-share earnings (the “E”), expressed as a single number.

How do you calculate a P/E ratio?

The P/E is typically calculated by dividing the current share price by the earnings of the last 12 months (also called the Trailing 12 Months or TTM).

However, it is sometimes calculated by using the estimated future 12 months’ earnings. In that case, it is called the “Forward P/E.”

Here’s an example: ABC Company made $1 million in earnings in the last 12 months, and it has 10 million shares outstanding. That means that the company’s TTM earnings per share, or EPS, comes out to $0.10 ($1mm divided by 10mm = $0.10). The cost of a single share of ABC is currently $2. Thus, its P/E is 20.

Price per share/Earnings per share = P/E
$2.00/$0.10 = 20

What if a company has no earnings?

Sometimes a company has negative earnings (losses). However, because a P/E by definition must be a positive number (it can’t go below zero, otherwise the company would be paying YOU to buy their shares!), in those cases, there simply is no P/E listed until earnings turn positive.

Once you’ve done the math, click the link to find out if a high P/E or a low P/E is better.

— Answer provided by Motley Fool members Jeb Sturmer and Kathie Ridgeway

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