Function

The P/E ratio is calculated by dividing a stock’s share price by its earnings per share. Earnings per share is usually the total earnings per share for the last four quarters. For example, if a stock has a share price of $50 and the earnings per share for the last year were $2.50, 50 divided by 2.5 gives a P/E ratio of 20. The P/E ratio of stocks with zero earnings or a loss cannot be calculated.

Significance

Examples

Some examples will provide a picture of the relative P/E values. All values are from the end of May 2010. Over the last 30 years, the P/E ratio for the S&P 500 index had ranged from 6.6 in 1982 to 44.2 at the end of 1999. As of May 2010, the index had a P/E of about 19.8. Here are the P/E values of some popular stocks:

Walmart: 13.2

These ratios can be used to compare the stocks against each other and the overall market.

Considerations

References

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