How to Calculate a P/E Ratio on a Stock

The P/E ratio is one of the most recognized indicators for a given stock. This calculation is also typically referred to as the price per earnings ratio and is a commonly used value used to analyze a stocks value. Most financial websites, including your online broker, typically provide this information for free. Since this ratio is commonly accessible, it is not that often that an investor needs to run the calculation on their own. However, to truly understand what the P/E ratio represents, it is a good idea to learn how to calculate it. You can use the following steps to run your P/E ratio using spreadsheet software or by writing out the calculation.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Calculator

1. Determine the earnings per share for the last four quarters of the security you are calculating the P/E ratio. Sum together these earnings which will be used as your denominator in the calculation. Using the last four quarters of earnings is referred to as the trailing earnings per share over the past year.

2. Find the current price of the stock you are using to calculate the P/E ratio. This value can be found on any financial website or your online discount broker. The price of the stock is also referred to as the market value of the security.

3. Take the price per share (P) and divide it by the trailing earnings (E) to calculate your ratio. There are actually several variations to calculating a P/E ratio, but this method is the most commonly used. Some ratio's take future earnings projections to run the calculations which provides a future P/E value on the stock.

4. Use your calculated P/E ratio in the prior steps to analyse a stock against it's peers. While this calculation should not be used on it's own as a decision to buy or sell a stock, it can help make an overall decision. It is important to keep in mind that financial stock calculations should not be used solely to make decisions. Instead, several factors including financial and technical indicators should be used.

Tips & Warnings

• Do your own due diligence on any stock before you decide to buy or sell a position.
• Purchasing a stock solely on a P/E ratio calculated with historical data does not offer any future projections. Likewise, using a future P/E ratio to make your decision will only provide projected earnings by analysts and is no guarantee.

Resources

• Buy Stocks Online