Message Font: Serif | Sans-Serif

No. of Recommendations: 0
Here's an explanation I wrote for our weekly newspaper feature (for more info on how to get it in your local paper: http://www.fool.com/Specials/1999/sp990409Newsprint.htm)

Selena

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.