[Hot News] [STOCKS] - What is a company stock's Price To Earnings Ratio?

As we learnt earlier, the book value of a share is the actual value of a share as recorded on the company record books after performing the balance sheet operations by the accountants of the company.

However, the market price of this same stock is quite different from the book value of the share and always remain volatile. The price of each of these stocks in the market depends on the corresponding company's "at that moment" evaluation and is always subjected to variations depending on the mood of the stock market.

What is the Market Capitalization of a company?

The Market Capitalization of a company = (Market price of the stock of that company) * (Total no. of shares in the market)

This from the earlier example means:

Market Capitalization = $3.50 * 1 million shares = $3.5m

The earnings of the company in 2015 was = $350,000

This is also called Trailing Twelve Months(TTS) earnings.

Thus the Earnings Per Share (EPS) = 0.35

Thus, the Price to Earnings (P/E) ratio = 3.50/0.35 = 10

i.e. we divided the value of each share with its total earnings per share for the year 2015 to arrive at our P/E value.

The significance of this value can be understood by looking into the inverse of this ratio and understanding that this is equivalent to the interest earned by the stock holder for each of these stocks over a period of 1 year.

Thus, higher the Price To Earnings (P/E) ratio, lower is the profit for the stock holder. On the other hand, lower the Price To Earnings (P/E) ratio, higher is the profit!