Price to Earnings Ratio

"Price to earnings ratio": (PER). The ratio of the equity value of a company to its accounting earnings (profit after tax). The PER can be calculated either on a per-share basis or on the total equity value and total earnings, giving identical results. Per share: PER = Current share price ÷ Earnings per share. On total values: PER = Total equity value ÷ Total earnings. For example, Company A's total equity value is $630m and its relevant earnings are $63m. Company A's PER: = $630m/$63m = 10. The Price to earnings ratio reflects the market's perception of the risk and the future growth prospects of the company. PERs can also be used as a very simple estimation or comparison model, for corporate valuation. In another case, say comparable PERs for an unlisted Company B are 12, and Company B's relevant earnings are $10m. The total value of Company B's equity can be estimated on this basis as: 12 x $10m = $120m. Sometimes written as P/E ratio or PE ratio. Also known as price earnings ratio.
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