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Here's an explanation I wrote for our weekly newspaper feature (for more info on how to get it in your local paper:


Q. Can you explain how to calculate a price-to-earnings (P/E) ratio? I see it everywhere, but I'm not sure what it is. -- P. R., Charlotte, N.C.

A. It's probably simpler than you think. The P/E is a measure that compares a company's stock price to its earnings per share (EPS). You can think of it as a fraction, with the price on top and the EPS on the bottom. Alternatively, tap the price into your calculator, divide by EPS, and voila -- the P/E.

Consider the Wicker Sink Co. (ticker: SIEVE), trading at $30 per share. If its EPS is $1.50, you just divide $30 by $1.50 and get a P/E ratio of 20. Note that if the EPS rises and the stock price stays steady, the P/E will fall -- and vice versa. A stock price of $30 and an EPS of $3 yields a P/E of 10. You can calculate P/E ratios based on EPS for last year, this year or future years.
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