What is P/E?

P/E stands for price earnings ratio also known as earnings multiple, and this is the most widely spread measuring analysis on how expensive a stock is. This ratio is calculated by the share’s market capitalization divided by its after tax earnings over a one year period. This calculation is the same even if it’s done for the whole company or for only pre stock basis. The higher of the P/E ratio of a company the market is willing to pay more for each dollar of it’s annual profits. Though the company has a high P/E ratio doesn’t exactly mean a good thing because it will be considered as a risky investment. It is risky because people have high expectations for it thus low P/E ratio companies are considered to be stable. By comparing two company’s ratio in the same industry a person can determine which company is more successful.