Price Earnings Ratio (P/E) Examples

Definition: Price Earnings Ratio (P/E) is calculated by dividing the market price of a stock by its most recent Earnings Per Share (EPS) value. It indicates how long the earnings will take to recover the cost of the shares. The higher the P/E ratio, the more the market is willing to pay for each dollar of company's earnings because it shows higher growth expectations.

Formula:
Price Earnings Ratio = Market price per share / Earnings per share

Example 1:
The net profit of Robert plc is $700,000, and there are 140,000 shares in that company in issue, the earning per share is $5. If the cost of one share is $30, then the PE ratio would be 30/5 = 6 times. The market value of every one dollar of earning is six times.

Example 2:
Market price of ordinary shares: $17.00
Net profit for the year: $870,000
Preferred share dividends: $20,000
Average common shares outstanding for the year: 500,000 shares

Solution:
Earnings per share (EPS)
= (Net profit – Preferred dividends) / Average shares outstanding
= ($870,000 – $20,000) / 500,000
= $1.70

P/E ratio = Common stock market price / EPS
= $17.00 /  1.70
= 10
This means that the price of the shares is 10 times the earnings of that shares.

Example 3:
Calculate the P/E ratio, given the following figures:
Ordinary shares of $1 each: $600,000
10% Preference shares of $1 each: $200,000
10% Debentures $100,000
Net profit after tax $800,000
Ordinary share dividends $80,000
Preference share dividends $20,000
Price per ordinary share $2.60

Solution:
Earnings per share = (800,000 - 20,000) / 600,000 = $1.30
P/E = 2.60 / 1.30 = 2 times

* Next: Earnings Per Share Formula & Example
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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