Corporate Accounting

# What is the Price Earnings Ratio?

## Price Earnings Ratio

The Price Earnings ratio is defined as the ratio of a company’s earnings per share to its price per share. It is most often used in the financial industry to analyze a company’s ability to make a profit.

This ratio is widely used in the market because it provides investors with good insights into how likely a company is to continue generating profits and hence, generating greater value for its shareholders. Therefore, it is a good gauge to predict the future profitability of a company.

The Price Earnings ratio tells us how much we would have to pay to own one share of the company’s stock as compared to the company’s earnings. In other words, the price-earnings ratio tells us how much we would have to pay for a single share of the company’s stock as compared to the company’s earnings per share. The higher the P/E ratio, the higher the price we pay for a share of the company’s stock, while the lower the P/E ratio, the lower the price per share we would buy.

## Why is the P/E Ratio Used?

The average P/E ratio is widely used in the stock market because it helps investors analyze the valuation of companies. The ratio helps investors understand what the actual worth of a company is in relation to the price it is selling for. The better the value of the company in relation to the price it is selling for, the better the P/E ratio.

Investors use the P/E ratio to value companies. The valuation is done in the context of the stock market. To make a judgment on the worth of a stock, investors need to analyze the P/E ratio. The P/E ratio helps in setting up a price per earnings (P/E) analysis to determine the amount of capital that is at stake in a transaction. The lower the P/E ratio, the better the value of the company in relation to the price it is being sold at.

## Summary

The P/E Ratio for any stock is just a snapshot of a stock’s price compared to the company’s earnings over the past 12 months. It is a way to gauge the health of a company and its stock performance. One company’s P/E Ratio can look completely different from another company’s.