The price-to-earnings (P/E) ratio is one of the most widely used tools that investors and analysts use to determine a stock’s valuation. The澳洲幸运5官方开奖结果体彩网: P/E ratio is one indicator of whether a stock is overvalued or undervalued. Also, a company’s P/E ratio can be benchmarked against other stocks in the same industry or the 澳洲幸运5官方开奖结果体彩网:S&P 500 Index.

The P/E ratio measures the market value of a stock compared to the company’s earnings. The P/E ratio reflects what the market is willing to pay today for a stock based on its past or future earnings. However, the 澳洲幸运5官方开奖结果体彩网:P/E ratio can mislead investors, because past earnings do not guarantee future e🍌arnings will be✱ the same. Likewise, projected earnings may not come to fruition.

Components of the P/E Ratio

Market Price

• The prevailing market price of a stock represents the “P” in P/E ratio.
• Stock price is determined by supply and demand in the market.

Earnings per Share

• 澳洲幸运5官方开奖结果体彩网:Earnings per share (EPS) is the amount of profit allocated to each share of a company’s 澳洲幸运5官方开奖结果体彩网:common stock. EPS is the portion of net income that would be earned per share if all profits were distributed to shareholders. Analysts and investors use EPS to establish a company’s financial strength.
• EPS represents the “E” in P/E ratio, where EPS = earnings ÷ total shares outstanding.
• As long as a company has positive earnings, the P/E ratio can be calculated. A company that is losing money has no P/E ratio.
• EPS is often taken from a company’s last four quarters of financial results, or the 澳洲幸运5官方开奖结果体彩网:trailing 12 months (TTM), and is called the 澳洲幸运5官方开奖结果体彩网:trailing EPS. However, EPS can also be taken from future earnings forecast over the coming four quarters, which is called the 澳洲幸运5官方开奖结果体彩网:forward EPS.

As a result, a company will have more than one P/E ratio, so 澳洲幸运5官方开奖结果体彩网:investors musඣt be careful to compare the same P/E when evaluating and comparing different🐈 stocks.

Calculating the P/E Ratio

To calculate a company’s P/E🍸 ratio, we use the following formula:

 $\text{P/E Ratio}=\frac{\text{Price per Share}}{\text{Earnings per Share}}$P/E Ratio=Earnings per SharePrice per Share​

Example of the P/E Ratio: Comparing Bꦿank of America and JPMorgan Chas♏e 

Bank of America Corp. (BAC) closed 2017 with the following:

• Stock Price = $29.52
• Diluted EPS = $1.56
• P/E = 18.92 or $29.52 ÷ $1.56

In other words, Bank of๊ Americaꦫ traded at roughly 19× trailing earnings. However, the 18.92 P/E multiple by itself isn’t helpful unless you have something to compare it with, such as the stock’s industry group, a benchmark index, or Bank of America’s historical P/E range.

Bank of America’s P/E at 19× was slightly higher than the S&P 500, which over time trades at about 15× trailing earnings.

To compare Bank of America’s P/E to a peer, we calculate the P/E for JPMorgan Chase & Co. (JPM) as of the end of 2017.

• Stock Price = $106.94
• Diluted EPS = $6.31
• P/E = 16.94

When you compare Bank of America’s P/E of almost 19× to JPMorgan’s P/E of roughly 17×, Bank of America stock does not appear as overvalued as it did when compared with the average P/E of 15 for the S&P 50♓0. Bank of Am൲erica’s higher P/E ratio might mean investors expected higher earnings growth in the future compared to JPMorgan and the overall market.

However, no single ratio♐ can tellඣ you all you need to know about a stock. Before investing, it is wise to use a variety of financial ratios to determine whether a stock is fairly valued and whether a company’s financial health justifies its stock valuation.

The Bottom Line

A company’s price-to-earnings 𒁏(P/E) ratio measures that com🌸pany’s market price compared to its earnings. It shows what the market is willing to pay today for a stock based on the company’s past or future earnings.