In short
The price-earnings ratio is a company's market price per share divided by its earnings per share. It shows how much investors pay for each dollar of earnings.
Key takeaways
- A high ratio usually reflects expectations of growth or low risk.
- Its inverse, earnings per share ÷ price, is the earnings yield.
- It is meaningless when earnings are negative.
Example
A share price of $60 and earnings per share of $4: the ratio is 15.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company with a current ratio of 0.8 uses cash to pay off an accounts payable balance. What is the effect on the current ratio?