What Is A Price Earning Ratio?

Essay by EssaySwap ContributorUniversity, Master's February 2008

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P/E is an easy way for anyone to see the ratio of a company's share price to its per-share earnings. For example, a P/E ratio of 10 means that the company has \$1 of annual, per-share earnings for every \$10 in share price. Earnings by definition are after all taxes etc. A companies P/E ratio is calculated by dividing the current market price of one share of the companies stock by the companies per share earnings. The per share earning are calculated by dividing the companies trailing (but sometimes leading) earnings by the total number of stocks. So for example, if the company had made \$50 million in the past 12 month?s, and had 10 million stocks, their per share earning would be \$5.

To help to prove my understanding of the P/E ratio I will do two examples, one from the Business section of the November 4th Toronto Star.

For November 4th?s example I chose the stock Amgen, which has the ID AMGN, and is on the Nasdaq market. The PE for this stock is listed at 55, and the closing price per share was 58.54. If these are both factual numbers than all I would need to do to find out the trailing earnings of the company would be to divide the Price of the share by the PE. This would be 58.54/55, and the equation shows that the trailing earnings per share is \$1.00.