price-earnings ratio

noun
price-earn·​ings ratio

Definition of price-earnings ratio 

: a measure of the value of a common stock determined as the ratio of its market price to its annual earnings per share and usually expressed as a simple numeral

Examples of price-earnings ratio in a Sentence

Recent Examples on the Web

Rising earnings, boosted by last year’s corporate tax cuts, have helped justify rich multiples and in some cases brought price-earnings ratios down. Michael Wursthorn, WSJ, "Bull Market’s Latest Hurdle: Slowing Sales Growth," 21 Oct. 2018 The reduced target is result of a decline in the company’s margins, and a cap imposed by Chinese authorities on price-earnings ratios in IPOs. Fortune, "Why the World's Biggest Electric-Vehicle Battery Maker Just Cut Its IPO Value by More Than Half," 29 May 2018 For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Barry Ritholtz, latimes.com, "Ranking the factors that help or hurt your investment returns," 14 June 2018 Look at the price-earnings ratio, or P/E, which is the price of a stock divided by its earnings per share. Mark Hulbert, USA TODAY, "Stock market: Guard against too much confidence in Russell 2000 high," 20 Mar. 2018 Only about 40 companies in the S&P 500 have a price-earnings ratio of less than 12, which is a sign of imminent decline. The Economist, "Who’s afraid of disruption?," 30 Sep. 2017 The estimate for the price-earnings ratio of the S&P 500 index for the week ended July 7 was 18.56. WSJ, "Corrections & Amplifications," 12 July 2017 Jack in the Box , which runs Chipotle competitor Qdoba, has a price-earnings ratio of 19. Justin Lahart, WSJ, "Chipotle Is a Recipe for Trouble," 9 Aug. 2017

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'price-earnings ratio.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

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First Known Use of price-earnings ratio

1929, in the meaning defined above

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Last Updated

15 Nov 2018

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The first known use of price-earnings ratio was in 1929

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More Definitions for price-earnings ratio

price-earnings ratio

noun

Financial Definition of price-earnings ratio

What It Is

The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price to its per-share earnings.

How It Works

The market value per share is the current trading price for one share in a company, a relatively straightforward definition. However, earnings per share (EPS) may not be as intuitive for most investors. The more traditional and widely used version of the EPS calculation comes from the previous four quarters of the price-to-earnings ratio, called a trailing P/E. Another variation of the EPS can be calculated using a forward P/E, estimating the earnings for the upcoming four quarters. Both sides have their advantages, with the trailing P/E approach using actual data and the forward P/E predicting possible outcomes for the stock. Calculated as the following;

Price-to-Earnings Ratio (P/E) = Market value per share / Earnings Per Share (EPS)

Moving on from the basics, let us do a sample calculation with company XYZ that currently trades at $100.00 and has an earnings per share (EPS) of $5.00. Using the previously mentioned formula, you can calculate that XYZ’s price-to-earnings ratio is 100 / 5 = 20.

[See extra examples and learn more about how to use the P/E ratio in The Most Famous Number in Investing]

Why It Matters

The price-to-earnings ratio is a powerful, but limited tool. For investors, it allows a very quick snapshot of the company’s finances without getting bogged down in the details of an accounting report.

Let us use our previous example of XYZ, and compare it to another company, ABC. Company XYZ has a P/E of 20, while company ABC has a P/E of 10. Company XYZ has the highest P/E ratio of the two and this would lead most investors to expect higher earnings in the future than from company ABC (which possesses a lower P/E ratio).

As noted earlier, the P/E ratio is limited. It does not paint the entire picture for the potential investor; rather it is a complementary tool in your financial toolbox. Be wary of forward EPS measures, (remember, EPS is an essential aspect of calculation of the P/E ratio) as they are matters of prediction and are only estimates of projected earnings. Further, trailing P/E ratios can only tell you what happened to a company in the previous time periods.

Source: Investing Answers

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