Price To Earnings Ratio

The price to earnings ratio (P/E) is the stock price divided by earnings per share (EPS). The price to earnings ratio can also be computed by dividing market capitalization (stock price X shares outstanding) by net income. "Trailing" earnings -- profits for the most recent four quarters -- are used to compute the price to earnings ratio. A "forward" price to earnings ratio, based on earnings estimates for the current or succeeding years, is also widely published. The price to earnings ratio of a stock is usually measured against those of equities with similar characteristics. A high price to earnings ratio may show the stock is richly valued; a low price to earnings ratio may indicate it has appreciation potential. But analysts will often differ on whether a particular price to earnings ratio is high or low. Moreover, the quality of earnings in the denominator of the price to earnings ratio will vary substantially. Finally, note that even comparisons among peers may be flawed when the firms have few earnings and their stock prices are based on capital appreciation potential.