## P/E Ratio

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# Price to Earnings ratio

Measuring market performance:

## Summary of P/E Ratio. Abstract

 The Price to Earnings ratio (P/E ratio) is a valuation ratio of a company's current share price compared to its per-share earnings. Even if Discounted Cash Flow is a superior method to value a company, sometimes investors prefer to use simpler methods. The P/E ratio is used for measuring market performance and can be calculated as: P/E ratio calculation: Market Value per Share : Earnings Per Share normally for a twelve month period.   Often the P/E ratio is used, because it is so easy to grasp: If you buy stock at a P/E ratio of 10, say, this means it will take 10 years for the company's earnings to add up to your original investment - 10 years to "pay you back". For example, a company that earned \$10M last year, with a million shares outstanding, had earnings per share of \$10. If that company's stock currently sells for \$100 per share, it has a P/E of 10. Stated differently, at this price, investors are willing to pay \$10 for every \$1 of last year's earnings.   The price to earnings (P/E ratio) assumes that the corporation will be worth some multiple of its future earnings. This method has at least two drawbacks: 1. it is based on earnings, accounting profits, which are not a good indicator of actual value creation for shareholders - more. 2. what multiplier should be used? The industry average? Often corrections are made based on: the company's expected growth, the rate of return on new capital and the costs of capital (WACC) Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide - Book: Ciaran Walsh - Key Management Ratios - Compare with the P/E Ratio: Market Value Added  |  EBIT  |  EBITDA  |  Economic Margin  |
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