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Definition

Price-to-earnings (P/E) ratio

Price-to-Earning (P/E) ratio is a simple ratio that measures the price of a company’s stock against its earnings. The P/E ratio is computed for a listed company in the SEC and calculated the current market price of per stock divided by its annual earnings/ profits.

Generally, the higher a company’s P/E ratio goes, the greater the market thinks it will grow. In 2008, New Venture fitness drinks earned 1.31 dollar per share. If it was listed on the NASDAQ and its stock was trading at 20 dollar per share, its P/E would be 15.3. This is what is meant when you hear that a company is selling for “15 times earnings”.

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