The Price-to-Earnings Ratio (P/E Ratio) is used in fundamental analysis of a stock. It's a simply the current price of the stock divided by the EPS (Earnings Per Share).

P/EPS

The purpose of this ratio is to normalize variable stock prices so they can be compared in an apples-to-apples comparison. A smaller number is better because it suggests the company is undervalued.

Not only is this ratio used to compare stocks against each other, but it also can be used within the same stock to chart profitability across time.

Jerry Robinson recommends (Fundamental analysis) a two-fold use of this ratio.

1. It should be below 20
2. It should be below its historical average

Let's take a look at a theoretical example company from the EPS zetel (Earnings Per Share):

Company 2

• Profits = $912,843,091,823
• Outstanding Shares = 98,237,498,273
• EPS = $9.29
• Current Stock Price = $48.06
• P/E Ratio = 5.17x

$48.06/$9.29 = 5.17x

Citations

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