The priceearnings ratio, or P/E ratio. Widely used by investors when valuing a company, and in making decisions to buy or sell shares. How to calculate the priceearnings ratio? How do some investors use the P/E ratio? And what are some of the reasons not to use it?

⏱TIMESTAMPS⏱
00:00 Introduction to P/E ratio
00:21 Priceearnings ratio calculation
02:05 How to use the P/E ratio
05:15 Priceearnings ratio disadvantages
07:42 P/E ratio assumptions

Let’s start off with the calculation of the P/E ratio. The priceearnings ratio equals the share price of a publicly traded company divided by its Earnings Per Share. If a company’s share price is $50, and EPS is $5, then its priceearnings ratio or P/E ratio is 10.

The essential question you are trying to answer when calculating the priceearnings ratio is: How much are investors willing to pay per dollar of earnings? Or in other words: how many years does it take to cover the price, if earnings stay the same.

Incorporating the growth rate into the picture adds some dynamics into the fairly static #PEratio. PEG (profitearningsgrowth) takes P/E one step further:    • PEG ratio  

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Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better #investing decisions. Philip delivers finance training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!