Tuesday, 11 April 2017

Price/earnings ratio

For example:

Profit after tax  $5 million
Number of issued shares 10 million
Earnings per share 50 sen
Current share price $7.50
Price/earnings ratio 15

This is one of the most helpful of the investment ratios and it can be used to compare different companies.

The higher the number the more expensive the shares.

It is often useful to do the calculation based on anticipated future earnings rather than declared historic earnings, although of course you can never be certain what future earnings will be.

The calculation is the current quoted price per share divided by earnings per share.

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