What is a Price to Earnings or P/E Ratio Money Over 55 What is a Price to Earnings or P/E Ratio?
Price to Earnings Ratios Can Be Useful If You Know How To Use Them By Dana Anspach, About.com A price to earnings ratio, otherwise known as a P/E ratio, refers to the price you are willing to pay today, for every $1 that a company either earned in the past year, or is expected to earn in a future year. Price to earnings ratios can be useful, or misleading, depending on how you use the data. The following examples will help you understand how to calculate P/E ratios, how they can lead you astray, and when they can be useful. Calculating Price to Earnings(P/E) Ratios: WIDGET Suppose you are looking at buying WIDGET stock, symbol WDGT. Here are the facts: The stock is selling at $20 per share. Last year, WIDGET had earnings of $1 per share. Analysts estimate the company will earn $2 per share this year. P/E ratio based on past earnings is 20. Calculation: $20/$1 = 20. P/E ratio based on projected earnings is 10. Calculation: $20/$2 = 10. This means you are willing to pay $10 for every dol
