What is the P/E ratio?


The price-to-earnings ratio (P/E ratio) is a common and quick way to assess the value of a company.  The P/E ratio is calculated using the following formula: P/E Ratio


The P/E ratio is a quick and easy tool for investors to compare the value of companies in different industries or of different sizes, or to quickly compare a single company to its previous performance over a specified time period.  A high P/E ratio might indicate that the company is over-valued while a low P/E ratio might indicate that it is undervalued.


There are two main types of P/E ratios:  Trailing and forward.  The trailing P/E ratio looks at actual data in the past, usually over the last 12 months, while the forward P/E ratio looks at projected data, specifically projected earnings per share (EPS).  While the forward P/E ratio does provide some insight into the organization’s projected success, it is assuming that success will occur.  For this reason, the trailing P/E ratio tends to be the most preferred of the two, as it looks at actual performance data.