Price To Earnings Ratio (PE): Definition, Formula, and Examples [+ Excel Template]

In this article

• What is the PE ratio? Is it important?
• How to calculate the pe ratio with the right formula
• Pe Ratio: Benchmarks by Sector
• Pe Ratio Example [+Excel Template]

What is the pe ratio? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about the price to earnings ratio. Furthermore, you will have access to an excel template with an example calculation that you can use you calculate the price to earnings ratio for any company.

What is the PE ratio? Is it important?

The P/E, or price-to-earnings, ratio determines the amount an investor can expect to invest in order to receive one dollar of a company’s earnings. In other words, the P/E ratio determines what the market is willing to pay today for a company’s shares based on its past or future earnings. Investors and analysts use P/E to indicate the relative value of a company's shares through an apples-to-apples comparison. Additionally, the ratio can be used to compare aggregate markets against one another or a company against its own historical record. A high P/E could indicate that a stock's price is overvalued relative to its earnings, while a low P/E may indicate that a stock’s current price is undervalued relative to earnings.

Occasionally, analysts may look at P/E 10 or P/E 30 measures to understand long term valuation trends, especially when trying to gauge the overall value of an index and compensate for changes in the business cycle. Additionally, analysts may use a forward P/E ratio to compare current earnings to future earnings and to get an idea of what earnings will look like without changes or accounting adjustments. The forward P/E ratio uses a company’s future earnings guidance rather than trailing earnings numbers.

Despite being one of the most popular ratios, the price-to-earnings ratio has a number of flaws that might actually mislead you in the wrong direction about a company. In this article, you can find out why te pe ratio is not so important.

How to calculate the pe ratio with the right formula

P/E = Market Cap / Net Income

OR

P/E = Share Price/ Earnings Per Share

The price-to-earnings ratio is quite easy to calculate: simply divide a company’s market cap by its net income.

Another way to calculate the P/E ratio is using per share numbers. In essence, divide a company’s share price by its earnings per share instead of dividing the company’s market cap by its net income. It’s important to remember that there are a few ways to calculate a company’s EPS, or earnings per share. The two main ways are to calculate earnings per share over the trailing twelve months or to use the EPS reported in a company’s earnings release.

Pe Ratio: Benchmarks by Sector

As of May, 06 2020, the sectors with the highest P/E ratios are real estate, utilities, and consumer staples. Energy, Materials, and telecommunication services are the sectors with the lowest P/E multiples.

Pe Ratio Example [+Excel Template]

I’ve created an example calculation of the cash conversion cycle to try out. You can use it to calculate the cash conversion cycle for any company. Click here to open the spreadsheet in Google Sheets.

More Resources

Finbox makes it easy to find companies with low P/E ratios. View the top 100 stocks with the lowest P/E multiples here.