Price to Earnings Ratio

def. Price to Earnings Ratio (P/E Ration).

$$\text{P/E}=\frac{\text{Share Price}}{\text{Earnings per Share}}=\frac{\text{MCAP}}{\text{Net Income}}$$

⇒ Think: for two firms…

• …if the market values the shares higher,
• …even though the earnings are low,
• …the market thinks the firm has growth potential.

How Good is the P/E Ratio? §

• The P/E ratio contains finance information so it’s a noisier measure compared to the EBITDA Multiple.
• It’s a better measure for the pure returns you get on the share. → EBITDA is a bigger, general rule of thumb, while P/E could be better for a small invester.

fundamental analysis.

\frac{\text{Company Size}}{\text{Profitability}}, thus measuring the growth of the company.