Price/Earning (P/E) – The smaller the numerical ratio the better.
This is one of the Valuation Ratios which lets you know if a stock is a good bargain buy. It helps answer the question “Is the company stock undervalued or overvalued?” Be careful to use other performance metrics along with any valuation ratio since a company may be undervalued due to poor performance.
Calculate this ratio using the below equation. Values in the equation can be acquired from the Balance Sheet and Daily stock price reported.
Equation:
P/E = (Market Price per Share) ÷ (EPS)
NOTE-1: P/E = 0 when a company operates at a loss (To determine Loss, see Net Income/Bottom Line of the Income Statement).
NOTE-2: Earnings can be manipulated so P/E should be used with caution. Price Sales Ratio (P/S) is the best metric for valuation since sales are not so easy to manipulate.