### 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