Financial Terms: What is PE Ratio? How Higher PE Ratio Benefits Companies’ Investments

PE Ratio: The P/E ratio (Price-to-Earnings ratio) is an important financial indicator that compares a company’s stock price to its earnings per share (EPS). An increased PE ratio means that investors are expecting good growth from the company in the future. Whereas, a low PE ratio may mean that the company is undervalued, i.e. less than its actual price, but a very high PE ratio may also mean that the share is overvalued. 

How to Calculate PE Ratio?

A PE Ratio (Price to Earning Ratio) tells you how much you are paying for the share of a company compared to its earnings. The formula to calculate PE Ratio is Share Price divided by Earning Per Share. For example, if the share of a company is Rs 100 and its EPS is Rs 10, then the PE Ratio will be 10, implying that the investor is paying Rs 10 for each rupee of the company’s earnings.