his price/earnings ratio calculator helps investors determine whether the stock of a particular company is overvalued or undervalued. If you're looking for a good opportunity to invest, make sure to read on; in the article below, we'll explain what is the price/earnings ratio and how to calculate it, as well as present a simple P/E ratio formula.

If you want to analyze the stock of a company in more detail, head straight to our price-to-book ratio calculator!

# What is the price/earnings ratio?

Price/earnings ratio - also often called the **price to earnings ratio** or the **P/E ratio** - is a finance indicator that measures a company's stock price concerning earnings per share. In simple words, it shows the **balance between price and earnings** from the stocks. Thanks to this ratio, we can see how profitable it is to buy shares of a specific company.

Also, we can use the P/E ratio to determine if shares are over- or undervalued. For example, if you consider two companies in the same industry, but with entirely different values of the P/E ratio, it might mean that the valuation of one of them is not believable.

# Price/earnings ratio formula

To calculate the price/earnings ratio, you need two elements:

**Price per share**- the market price of a stock. This value heavily depends on the supply and demand on the market.**Earnings per share**- the profit which a company gains from each outstanding share of common stock. If a company doesn't have any net income, but only net losses, it won't have a P/E ratio.

If you want to know what is the P/E ratio of a certain company, you need to divide the share price by the earnings, according to the P/E ratio formula below:

P/E ratio = share price / earnings per share

# How to calculate the price/earnings ratio?

Let's analyze the example of a company that has been on the market for several years. To find out what is their price/earnings ratio, you need to do the following:

- Determine the market
**share price**. Let's assume that it is equal to $25. - Determine the
**earnings per share**over the last 12 months. In our example, we'll set this value to $1.80. - Use the price/earnings ratio formula:

`P/E ratio = 25/1.80 = 13.90`

- As you can see, the
**P/E ratio**in our example is roughly 14x earnings.

# Interpreting the results of P/E ratio formula

Now that we arrived at a result, we can try to interpret it. As a general rule, a company with a high P/E ratio is considered more profitable on the market - it means that investors are willing to pay more per share because they anticipate fast growth and higher future earnings.

To determine whether the price/earnings ratio is high or low, you need to compare it with the P/E ratios of other companies in the same industry. For instance, if your company has a P/E of 14x earnings, and most of its competitors of 12x earnings, you could say that your business is considered more valuable by the market.

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