1. What is the Price to Earnings Ratio?

The Price to Earnings (P/E) ratio is a valuation metric that compares a company's stock price to its earnings per share. It helps investors assess whether a stock is overvalued or undervalued relative to its earnings.

2. How Does the Calculator Work?

The calculator uses the P/E ratio formula:

Where:

• \( \text{Market Price per Share} \) — Current stock price (USD/share)
• \( \text{Earnings per Share (EPS)} \) — Company's earnings divided by outstanding shares (USD/share)

Explanation: The ratio shows how much investors are willing to pay per dollar of earnings. A higher P/E suggests higher growth expectations.

3. Importance of P/E Ratio

Details: P/E ratio is crucial for stock valuation, comparing companies within the same industry, and assessing market expectations about future growth.

4. Using the Calculator

Tips: Enter the current market price per share and the company's earnings per share (EPS). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good P/E ratio?
A: There's no single "good" ratio. Typically, ratios are compared within industries. The S&P 500 average is around 20-25 historically.

Q2: What does a high P/E ratio indicate?
A: High P/E may indicate overvaluation or high growth expectations. Low P/E may suggest undervaluation or financial troubles.

Q3: What are the limitations of P/E ratio?
A: Doesn't account for debt, uses past earnings (trailing P/E) which may not reflect future performance, and varies by industry.

Q4: What's the difference between trailing and forward P/E?
A: Trailing P/E uses past earnings, forward P/E uses estimated future earnings. Forward P/E is more speculative but may better reflect growth potential.

Q5: How does P/E relate to earnings yield?
A: Earnings yield is the inverse of P/E (EPS/Price). It shows the percentage return on investment if earnings remain constant.