The price-earnings ratio is a valuation measure calculated by dividing a company's current share price by its earnings per share (EPS). It shows how many dollars investors are willing to pay for each dollar of the company's annual profit. A company whose shares trade at $60 and which earned $3 per share has a price-earnings ratio of 20. The full treatment of the measure is in the main entry on the price-to-earnings ratio (P/E).
How this term relates to the P/E ratio entry
"Price-earnings ratio," "price/earnings ratio," "P/E ratio" and "earnings multiple" all refer to the same calculation, and accounting textbooks often use the first form. The main entry explains trailing and forward versions, what high and low ratios can signal, and the ratio's limitations. From an accounting point of view, the key input is the EPS figure, which is drawn from net income on the income statement and can be affected by one-off gains, impairments and changes in accounting methods. The inverse of the ratio, earnings divided by price, is the earnings yield. Investors often compare the ratio with related measures such as the price-to-book ratio and the dividend yield, and with the company's market capitalization relative to total earnings, which gives the same result.