How to Calculate Price Earnings Ratio

Price Earnings Ratio (P/E) is a commonly used valuation measure that compares the price of a share to the earnings per share. The higher the ratio, the more expensive the stock is relative to the earnings of the company.

Learn how to calculate the P/E ratio with the following example:

Robert Ltd has the following information:
Ordinary shares of $0.50 each: $400,000
10% Preference shares of $0.50 each: $300,000
15% Loan stock $250,000
Net profit after tax $500,000
Ordinary share dividends $45,000
Preference share dividends $30,000
Price per ordinary share $3.54

Then,
Number of ordinary shares = $400,000 / $0.50 = 800,000
EPS = (Net profit – Preferred dividends) / No. of shares outstanding = (500,000 - 30,000) / 800,000 = $0.59
Price Earnings Ratio = Market price per share / Earnings per share = 3.54 / 0.59 = 6 times
This means that the capital value of the share is 6 times higher than the current level of earnings.

* Next: How to Calculate Earnings Per Share (EPS)