Financial Encyclopedia
P/E ratio
Definition
The price-to-earnings (P/E) ratio measures current share price of a company relative to earnings per share (EPS).
Example
Suppose it is necessary to value O’Key. It is a public company whose main competitors in Russia are Magnit, X5 Retail Group and Lenta.
It is necessary to collect data on companies for the 2nd quarter of 2022.
P/E (Magnet) = 7.6
P/E (X5 Retail Group) = 5.2
P/E (Lenta) = 7.3
Mean = (7.6 + 5.2 + 7.3) / 3 = 6.7
O'Key's P/E is 7.6, which is higher than the industry average of 6.7, which means the company is not cheap.
More detailed
P/E = Price / EPS = Market Capitalization / Net Income,
where
Price - share price, EPS (earnings per share) - earnings per share, Market Capitalization - market capitalization, Net Income - profit for the period
The P/E ratio shows the expectations of the market and is the price you must pay per unit of current earnings.
A P/E ratio can be used by analysts when comparing against similar companies in the same industry or for a single company across a period of time. If the P/E of the company is below the industry average, the company is considered cheap.
According to Ranks methodology, this indicator is analyzed in the Value block and used along with other indicators to calculate the score.
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