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Price earnings ratio

A ratio that compares the earnings per share and market price per share. It tells us that the market price is X times the earnings and, ultimately, how long it would take to recover the price paid for a share, assuming earnings remain constant. It is calculated by dividing the market price into the earnings per share and is expressed as number of times. A high ratio means that people are willing to pay a price many times higher than the return currently being produced for shareholders by management and thus, a high ratio indicates a high level of confidence in the company. The ratio should also be judged in relation to other companies in the same sector or industry.

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