The P/E ratio (Price-to-Earnings ratio) is calculated by dividing the market price of a share by the company's earnings per share (EPS).
Here's a breakdown:
- P/E Ratio = Market Price per Share / Earnings Per Share (EPS)
Let's illustrate with an example:
Imagine Company ABC has a share price of $90, and its earnings per share are $9. The P/E ratio would be calculated as follows:
- P/E Ratio = $90 / $9 = 10
Therefore, Company ABC's P/E ratio is 10. This means investors are willing to pay $10 for every $1 of Company ABC's earnings.
