Price Earnings Ratio Definition
The price earnings ratio (PER) is the ratio of a company’s share price to its earnings per share. The PER gives investors an idea of how much they are paying for each dollar of a company’s earnings. A high PER indicates that investors are willing to pay more for each dollar of earnings, while a low PER indicates that they are not willing to pay as much.
The PER can be calculated using either the current share price or the average share price over the past year. For example, if a company’s stock is currently trading at $50 per share and its earnings per share for the past year were $5, then its PER would be 10 ([$50/$5]). If the company’s stock averaged $40 per share over the past year and its earnings per share were still $5, then its PER would be 8 ([$40/$5]).
Investors often use the PER to compare companies within the same industry. For example, if Company A has a PER of 12 and Company B has a PER of 18, then Company B’s shares are relatively more expensive than Company A’s shares. This doesn’t necessarily mean that Company B is a better investment than Company A – it could just mean that investors are expecting higher growth from Company B.
