How to calculate price earnings ratio

The price-to-earnings ratio, or P/E ratio, is a valuation ratio used in fundamental analysis. The ratio compares a company’s market price per share to its earnings per share or EPS. To calculate a company’s P/E ratio, simply divide its market price per share by its EPS over a certain fiscal period.

Explaining How to Calculate Price-to-Earnings Ratio in Excel

Assume you want to compare the P/E ratio between two companies, which are in the same sector, using Microsoft Excel. First, right click on columns A, B and C and left click on Column Width, and change the value to 25 for each of the columns. Then, click OK. Enter the name of the first company into cell B1 and of the second company into cell C1.

For example, Apple Inc. and Google Inc. are competitors. Apple has trailing 12-month diluted EPS of $3.30, while Google has trailing 12-month diluted EPS of $45.49. On October 21, 2020, Apple closed at $116.87, while Google’s shares closed at $1,593.31.

In cells B1 and C1, enter Apple and Google, respectively. Then, enter Diluted EPS into cell A2, Market Price Per Share into cell A3 and P/E Ratio into cell A4.

Enter =3.30 into cell B2 and =116.87 into cell B3. Calculate the P/E ratio for Apple by entering the formula =B3/B2 into cell B4. Apple’s resulting P/E ratio is 35.41.

Next, enter =45.49 into cell C2 and =1593.31 into cell C3. Calculate the P/E ratio for Google by entering the formula =C3/C2 into cell C4. The resulting P/E ratio is 35.03.

Investors are willing to pay $35.41 for $1 of Apple’s current earnings, and willing to pay $35.03 for $1 of Google’s current earnings.

For this part of Investing for Beginners 101, I’m going to help beginning investors do their own research in stocks and show how to calculate P/E ratio from a company’s 10-k annual report. This guide will have pictures and links to make it very easy to follow and learn the procedure. The 7 steps to understanding investing are as follows.

In order to research companies and evaluate whether they are good stock buys, you really don’t need any special skills or education. In fact, if more people knew how to research stocks and took the time to do a little research on some companies, I think a lot of so called experts and mutual fund managers would be out of work! Unfortunately, this hasn’t been the case and for whatever reason, individual stock picking has been frowned upon as reckless and risky.

Reality: Only You Are Responsible

In reality, picking individual stocks leaves all the responsibility of your money on yourself, a taboo way to think for sure. In a culture where it’s never your own fault and always someone else’s, no wonder the average investor flocks to mutual funds every year. If more people took responsibility for their own money and were willing to see their portfolios drop in value without selling at the worst possible time, there’d be more happy and increasingly profitable investors. My hope is to see more investors educating themselves and making smart, disciplined stock picks with the long term in mind.

Arguably the first thing you should learn about individual stock picking is how to calculate P/E ratio from a company’s annual report. P/E ratio simply measures how much you are paying for a company’s earnings, the higher the ratio the more expensive the company. A higher P/E ratio generally means a company is more popular and more people are buying this stock. P/E ratios vary based on industry and based on market conditions, and you can tell when the market is overvalued because the average P/E ratio is high.

An average P/E ratio is about 17, and I only look for companies who have a P/E below 15. Most fundamentalists agree that any P/E over 25 is too high, regardless of the industry or market condition. Stocks with high P/E ratios tend to have great stories and the most optimistic of futures, but as the stock becomes more and more overvalued the bubble eventually pops and everyone who bought in when the company had a high P/E ratio lose money. The thing with buying these stocks with high P/E ratios is that there is no way to tell when the price of the stock will catch up with its valuations, meaning when the stock prices crash to normal levels. While you can make some nice short term gains from buying stocks like this, using this strategy regularly is essentially gambling and it is not an investment strategy I promote.

I buy companies with low P/E ratios for two reasons.
1. Low P/E= company is potentially undervalued, low price
2. Low P/E= company most likely has high earnings

If you look at various studies, there has been a proven correlation between low P/E ratio and above average returns. What Works on Wall Street by James O’ Shaughnessy showed multiple back tests proving this, and also there have been articles on the Motley Fool website confirming the correlation.

To calculate P/E you take a company’s market cap and divide by their earnings. P/E means price to earnings ratio, and is simply:

P/E= Price/Earnings

To look up a company’s earnings from their annual report, go to this website: SEC Filings. Type in the company’s ticker in the search bar, as an example I’m going to show how to calculate the P/E ratio for Ford (F). Once the company is found, type 10-k in the filling type box.

Find the latest filing date and click on documents for the 10-k. From there, click on the .htm link for the 10-k, in this case the first line. Note: Sometimes the company doesn’t put their income statements on the “10-k” and instead will file it under exhibit 13. This is a rare case though and you will be able to quickly tell if a company did this after clicking on the 10-k .htm file.

Once you are in the 10-k do a “Ctrl-F” to search, and search for “consolidated balance”. Click through until you are looking at the company’s consolidated balance sheet, it looks something like this:

Now, we want to find the Consolidated Statement of Earnings. (Sometimes called Consolidated Statement of Income, sometimes called something completely different). Most of the time the Statement of Earnings is right above the Balance Sheet, occasionally it’s below. Scroll up until you see the income sheet, and look for Net Income attributable to Ford Motor Company. In this case for 2012, you can see it’s $5,665 million. Now that we have the earning number, we want to calculate market cap.
How to calculate price earnings ratio
You can google a company’s market cap, which is updated regularly on most financial websites. If you want to be detail oriented like me, or be able to look up a company’s market cap for previous years, search the 10-k document for “shares outstanding”. Once you have the number of shares outstanding for 2012, simply multiply this by the share price to get the company’s market capitalization. Note: You always want the Diluted number for shares outstanding, as it is more accurate (takes into account employee stock options).
How to calculate price earnings ratio
So, once you have these values, simply take market cap/ earnings to calculate P/E ratio. For Ford, using today’s stock price of $13.36, we get a market capitalization of $53.6 Billion. Divide this by the earnings, $5.6 Billion, and the P/E is 9.46. Auto makers tend to have a low P/E due to the industry, so compare to its competitors to see if the ratio is favorable.

Keep in mind that most P/E ratios you see on financial websites are calculating future earnings, based on projected numbers. Thus, these numbers can fluctuate greatly and quickly, which is one reason I like to use past earnings to calculate P/E ratio. I also like to average the past 3 years of earnings to make my calculations more accurate and with a longer term outlook.

Depending on the rigor of the analysis, I’d also recommend to calculate P/E ratio over an average of 7 years of earnings, as Ben Graham did in his book The Intelligent Investor.

Enter the current price of a stock and the total earnings of that company into the price/earnings calculator. The result will be a ratio of price to earnings in decimal and percentage.

Price/Earning Ratio Calculator

The following formula is used to calculate the price-to-earnings ratio of a company.

  • Where P/E is the price to earnings ratio
  • PS is the current stock price
  • E is the total yearly earnings.

It’s important to note that the ratio will be in terms of however long the period of earnings is that you enter into the calculator. For example, the ratio will be different if you use quarterly earnings as opposed to yearly earnings.

Price to Earnings Ratio Definition

Price to earnings ratio or P/E for short is a measure of the current stock price, or market cap, to the total yearly earnings.

How to calculate price to earnings ratio?

How to calculate price to earnings ratio?

    Determine the total price of the stock

Look up your company through google and determine the stock symbol it’s traded under. Look up that stock symbol and find the price of the stock.

Determine the earnings of the company

Look of the total earnings of a company using their 10-K or a trading dashboard/platform.

Calculate Price/Earnings Ratio

Enter the information into the formula to calculate the ratio.

This is a ratio that represents the price of a stock compared to the total earnings of the underlying company associated with that stock.

This ratio is one of many indicators used to value a company, but not the only one. For example, a company that has a high potential for massive earnings in the future but currently with low earnings will have a very high ratio.

The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a market prospect ratio that calculates the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings.

Investors often use this ratio to evaluate what a stock’s fair market value should be by predicting future earnings per share. Companies with higher future earnings are usually expected to issue higher dividends or have appreciating stock in the future.

Obviously, fair market value of a stock is based on more than just predicted future earnings. Investor speculation and demand also help increase a share’s price over time.

The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. This is why the price to earnings ratio is often called a price multiple or earnings multiple. Investors use this ratio to decide what multiple of earnings a share is worth. In other words, how many times earnings they are willing to pay.

Formula

The price earnings ratio formula is calculated by dividing the market value price per share by the earnings per share.

This ratio can be calculated at the end of each quarter when quarterly financial statements are issued. It is most often calculated at the end of each year with the annual financial statements. In either case, the fair market value equals the trading value of the stock at the end of the current period.

The earnings per share ratio is also calculated at the end of the period for each share outstanding. A trailing PE ratio occurs when the earnings per share is based on previous period. A leading PE ratios occurs when the EPS calculation is based on future predicted numbers. A justified PE ratio is calculated by using the dividend discount analysis.

Analysis

The price to earnings ratio indicates the expected price of a share based on its earnings. As a company’s earnings per share being to rise, so does their market value per share. A company with a high P/E ratio usually indicated positive future performance and investors are willing to pay more for this company’s shares.

A company with a lower ratio, on the other hand, is usually an indication of poor current and future performance. This could prove to be a poor investment.

In general a higher ratio means that investors anticipate higher performance and growth in the future. It also means that companies with losses have poor PE ratios.

An important thing to remember is that this ratio is only useful in comparing like companies in the same industry. Since this ratio is based on the earnings per share calculation, management can easily manipulate it with specific accounting techniques.

Example

The Island Corporation stock is currently trading at $50 a share and its earnings per share for the year is 5 dollars. Island’s P/E ratio would be calculated like this:

As you can see, the Island’s ratio is 10 times. This means that investors are willing to pay 10 dollars for every dollar of earnings. In other words, this stock is trading at a multiple of ten.

Since the current EPS was used in this calculation, this ratio would be considered a trailing price earnings ratio. If a future predicted EPS was used, it would be considered a leading price to earnings ratio.

Comparison of a company’s stock to another company’s stock is always a point but, the P/E ratio is an exception, as the investors or the analysts are quite determined to use this ratio for a one to one comparison rather than a one to two. You will find details of Price/Earnings Ratio Calculator in this article

How to calculate price earnings ratio

Also, it can be used for comparison of the same company’s historical records for aggregate market comparison over a certain time. The reason for the comparison of companies, all of which meet certain standards is briefly mentioned in the article.

Price/Earnings Ratio Calculator

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PE Ratio Calculator Details

The factors required to be put into the formula to work out the same are:

  • Price per share
  • Earnings per share

The prior factor required is the price per share, which can be determined by the market listing and taken into consideration.

The second factor is the earning per share, which can be obtained when the net income of the company which is found in the company’s income statement is divided by the weighted average of outstanding shares.

We suggest you to use this formula for determining the value of the stock of a company, rather than comparing one stock from another, because each company’s accounting method differs, thereby making it difficult to form a basis of comparison.

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Price/Earnings Ratio Calculator Product Details

Well now we are well versed with the factors of the formula and it is time we get discussing about the product thereby received.

The product of the formula shall be the Price to Earnings ratio, which is the point of calculating the formula itself. If the product is higher, the investors happen to assume the price of the stock is simply overvalued or they expect a higher return on the investments they make, maybe in the future.

For a company which is on loss, the ratio won’t exist in the first place as the denominator will be zero for the same.

How to use Price/Earnings Ratio Calculator?

Factors are clear and so, you need to use them in the best possible way to know which company is worthy of investment and which is not.

The product will determine the underlying question and to obtain the same, you need to calculate the formula, which is made easy by the calculator we included along, in this article along with the information on Price to earning formula.

Keep the factors handy always and then, move ahead and enter them in the calculator which you will find at the bottom of the page in their places they need to be.

When you press enter after filling the factors, you will be able to get the product you’re in search of.

Find out other Financial Ratios & Technical Analysis Calculators here

Example of PE Ratio Calculator Usage

Let us assume a company with a price per share of Rs.100 makes an earning of Rs.7 per share. If the interest investor wants to calculate the value of the stock, he would have to find the product this way.

Price to Earning – P/E Ratio = Price per Share / Earnings per Share

Let us calculate the formula from the example now:

Price to Earning – P/E Ratio = 100 / 7

Therefore, the company we have been trying to calculate the product of has a price to earning ratio of 12.29.

What is the use of Price to Earnings or P/E Ratio Calculator?

The ratio is a basis of calculating how the market perceives the share as compared to the earnings it makes.

The use of this ration therefore has some restriction and limitation because the net income is calculated on a different basis for different industries.

It also differs when companies belong from different nation. Hence, use the ratio to compare the price for companies belonging to a single industry and also to one country.

There are industries which are perceived to have a better and increased growth for the future, while the others are perceived to fetch a normal and steady growth rate i.e. an established growth rate.

Price to Earnings (P/E Ratio) Calculator Formula

Here is the formula of future value we have been speaking of.

How to calculate price earnings ratio

The main idea behind calculation of this formula is to understand how much a company is earning, while how much the market thinks it must be of worth.

If the obtained ratio is higher, then it is considered to be a better investment as according to the market. This formula is also known as the price multiple or the earnings multiple.

There are also shortcomings associated with this formula, one of which is mentioned for the terms and conditions, while the others are companies having net loss and of self-referencing.

Price to Earnings (P/E Ratio) – Conclusion

The end note here would be, even though the formula has a certain number of shortcoming, keep in mind the terms and conditions referred, and you shall be able to find the formula to be worthy enough for you decision making process.

If you get stuck anywhere in the article, unable to understand it, you can ask for our help through the comment section below.

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A simple and effective method for understanding a stock’s value now and in the future.

The price-to-earnings ratio, or P/E, is arguably the most popular method for valuing a company’s stock. The ratio is so popular because it’s simple, it’s effective, and, tautologically, because everyone uses it.

Let’s go through the basics of valuing a company’s stock with this ratio and work out how this calculation can be useful to you.

Calculating the value of a stock
The formula for the price-to-earnings ratio is very simple:

Price-to-earnings ratio = stock price / earnings per share

We can rearrange the equation to give us a company’s stock price, giving us this formula to work with:

Stock price = price-to-earnings ratio / earnings per share

To calculate a stock’s value right now, we must ensure that the earnings-per-share number we are using represents the most recent four quarters of earnings. This is called the company’s trailing-12-month earnings per share, and it can be found for most all public companies with a quick Internet search.

After looking up the company’s trailing-12-month earnings per share, next we need to look up the company’s P/E ratio. For the sake of understanding the ratio, you can use the P/E ratio listed on any of the many financial websites out there today, including Fool.com. Your broker should also have this information.

Finally, with these two numbers in hand, simply divide the P/E ratio by the earnings per share number and you’ll have the company’s current stock price. It’s just that easy.

Using this method to improve your investing
If you use a company’s current trailing-12-month earnings per share and P/E ratio, you aren’t learning anything new about the stock. Your result will always match the stock’s current price, which doesn’t help you invest for the future.

However, by analyzing a company’s future earnings potential and how the market values its competitors, you can use the P/E ratio to understand where you think the stock’s price could be in the future.

For example, if the company has a major new product release coming next quarter, you could predict how that release may increase its earnings per share going forward. Most likely, your research will indicate a range of possible earnings per share predictions based on how well the product release goes.

You could also analyze the company’s competitors to see how their current price-to-earnings ratio compare. If the competitor’s P/E ratios are higher or lower than your company, then you could investigate why that is and what could change to drive their ratios either closer together or farther apart. You may determine that the there are no significant reasons and predict that the company’s P/E ratio is likely to either rise or fall in the future to match the competition.

After you’ve completed your analysis, you can use the results to create a matrix to show where the stock price would be under various P/E ratio and earnings per share combinations.

Stock price matrix of possible P/E ratios and earnings per share

EPS 13 13.25 13.5 14 14.25 14.5
$1.00 $13.00 $13.25 $13.50 $14.00 $14.25 $14.50
$1.10 $11.82 $12.05 $12.27 $12.73 $12.95 $13.18
$1.15 $11.30 $11.52 $11.74 $12.17 $12.39 $12.61
$1.20 $10.83 $11.04 $11.25 $11.67 $11.88 $12.08
$1.25 $10.40 $10.60 $10.80 $11.20 $11.40 $11.60
$1.30 $10.00 $10.19 $10.38 $10.77 $10.96 $11.15

In the hypothetical example here, the first column shows the possible earnings per share numbers and the top row shows possible price-to-earnings ratios. The middle section of the chart shows what the stock price would be under each combination based on the aforementioned formula.

For a real analysis, the first column would be based on your analysis of the company’s future earnings per share, and the top row would be based on your research of the competition.

This matrix tells you not just what the stock price would be in the specific outcome your research predicts, but also the stock price for a range of other outcomes.

It’s impossible to predict the future, so there is no guarantee that any stock will perform as you predict. However, using the price-to-earnings ratio to value a company’s stock in a variety of different situations is an effective way to understand the implications for all sorts of various outcomes. It’s an easy and quick exercise to include in your stock research practices to take your investing to the next level.

Use past, future, or average earnings to see which is most useful

How to calculate price earnings ratio

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Dana Anspach is a Certified Financial Planner and an expert on investing and retirement planning. She is the founder and CEO of Sensible Money, a fee-only financial planning and investment firm.

The price to earnings (P/E) ratio is a common formula used in the analysis of stocks and stock markets. It tells you the amount investors are willing to pay for a dollar of reported profits. There are several different ways the P/E ratio can be calculated.

3 Types of Calculations to Forecast P/E Ratio

Below are the three most commonly used calculations.

Last Year’s Earnings

This calculation takes the current price of a stock divided by last year’s corporate earnings.

Let’s look at a company whose stock price is $50/share. Let’s assume the company is making a profit and reported earnings of $5/share. The P/E would be $50/$5 or a 10 to 1 ratio. It means that, at the current price, investors are willing to pay $10 for every $1 of reported earnings.

The problem with relying on this calculation is the possibility that next year will be nothing like last year; corporate earnings could help me much higher, or much lower.

Earnings Forecast

This calculation takes the current price of the stock (or group of stocks) divided by an average of all of the predicted earnings put forth by analysts and the companies themselves. The problem with this calculation is there are numerous occasions where companies do not earn what they were projected to earn.

That guessing game is what makes stocks and the stock market so difficult to evaluate. No one truly knows what will happen next year. Professional investors or investment management companies will make forecasts. Some will be right, and some will be wrong.

Analyst opinions and forecasts will always be changing as new information becomes available.

When you look at stock research websites, they will normally provide you with ratios based on past and projected earnings. It gives you a frame of reference to use when comparing one company to another company in the same industry. If two similar companies have vastly different P/E ratios, you’ll want to do more research to find out why.

Ten Year Average

This calculation is most often used to look at the value of an entire market instead of an individual stock. It takes the current price of the market divided by corporate earnings as averaged over the past ten years. This ratio is called P/E 10, and the method was developed by Professor Robert Schilling. It is designed to even out the inconsistencies that can come from using only one year of past or projected earnings’ data.

Much research supports the validity of P/E 10 as an appropriate way to value a market as a whole. It can be useful in figuring out where things are relative to the past. This data is often used to determine how “expensive” the market is.

When running statistics on the stock market, it is often best to use all three types of P/E ratios—not just one. Regardless of which way you look at P/E ratios, the information is useless unless you can put it in perspective.

How to Calculate a P/E Ratio

How to calculate price earnings ratio

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Dana Anspach is a Certified Financial Planner and an expert on investing and retirement planning. She is the founder and CEO of Sensible Money, a fee-only financial planning and investment firm.

A price-to-earnings ratio, otherwise known as a P/E ratio, is a quick calculation used to evaluate how expensive or cheap a stock may be at any given time.

What Is a Price-to-Earnings (P/E) Ratio?

Just as an appraiser can come out and give you an estimate of the value of your home, the price-to-earnings (P/E) ratio is a tool you can use to estimate the fair value of the stock market.

The P/E ratio is also a metric used to help compare stocks in the same industry to one another. The P/E ratio is not as useful when comparing stocks across different industries or those that produce different products and services.

Some industries are known to have much higher P/E ratios than others, so only compare like with like.

For example, the advertising industry in January 2020 had a P/E ratio of 20.01 while the aerospace industry P/E ratio ran at 35.11.  

How Do You Calculate a P/E Ratio?

In simple terms, a P/E ratio is the price (P) divided by earnings (E).

How to calculate price earnings ratio

A stock with a price of $10 a share, and earnings last year of $1 a share, would have a P/E ratio of 10. If the stock price goes up to $12 a share and the earnings stay the same, the stock’s P/E ratio would then be 12 and the stock would be relatively more expensive because you are now paying a higher price per dollar of earnings.

There are many ways to calculate P/E ratios. The most common three formulas used are:

  1. Look at the P/E ratio based on last year’s earnings. This is also called the TTM method for Trailing Twelve Months.
  2. Use a future forecast of earnings either provided by the company or by stock analysts. This method is known as the Forward P/E Ratio.
  3. Take a broader view by using a 10-year average of past earnings adjusted for inflation. This is something called P/E 10, Shipper P/E Ratio, or CAP/E which stands for cyclical adjusted price-to-earnings.

How Price-to-Earnings Ratios Work

Price-to-earnings ratios for an individual stock must be interpreted much differently than P/E ratios for the market as a whole. The P/E ratio for the S&P 500 has ranged from a high of 40 during the tech bubble in the ’90s to a low of 7 at the bottom of a few bear markets.  

The P/E ratio for an individual stock is telling you if the market is overvaluing that particular stock based on how many people are willing to buy it and its value over time. Generally, the lower the number the better because it suggests the company may be undervalued, and worth buying.

Limitations to P/E Ratios

Novice investors can often make the mistake of using a P/E ratio to buy a stock that appears undervalued or sell one that appears overvalued. They interpret the data too narrowly and forget that the “E,” which is earnings data, is either past data (and the future may be different) or the earnings data is an estimate of the future (and the future may be different). For this reason, use P/E ratios with caution, and don’t use them as single decision-making tool.

A volatile market can affect the short-term P/E ratio and make it less reliable. The P/E ratio also fails to include any consideration of future earnings growth.

Difference Between P/E Ratio and PEG Ratio

The PEG ratio, meanwhile, incorporates earnings growth by measuring the ratio between the price/earnings ratio and earnings growth.