Price to Earning Ratio commonly termed as (P/E or PE) Ratio is one of the most common method of deriving the valuation of any company. It helps in deciding how attractive the stock price is at current market rate. It is calculated by dividing the stock price by the Earning per share (EPS) of the company.
Price to Earning (P/E) Formula
For a company of P/E ratio 10 means the company stock is trading at 10 multiple of its earning per share. The earning per share is generally based on last 12 months earnings, this is also termed as TTM ‘trailing twelve months’. If earning estimates of next 12 moths is taken then it is called as Forwarded P/E ratio.
The term is used to identify stocks attractively priced for investment. The P/E ratio vary form different industry sector, therefore it is compared for companies in same industry sector only.