How to Value Shares (4)

P/E ratio

P/E ratio is a very important ratio for valuing the performance of a share.

It is arrived at by dividing the current market price by the earnings per share.

For example, if the current market price of a company is £30 and the earnings per share is £5 per share,

then the P/E ratio is £30 divided by £5 which is 6.

Note that no percentage or unit is attached to the figure.

P/E ratio provides two lots of information, primarily.

It does give the investor a rough idea of the pay-back period for the amount of money invested in each share.

In the example above, for instance,

a P/E ratio of 6 informs the investor that it will take 6 years of receiving returns of £5 per share per year, to recoup the £30 used in buying one share.



By David Opoku