PE Ratio and Earning
P/E
ration reflect the future prospectus of the company and may be calculated with
by dividing market price with EPS. The relationship between PE ration and market
price may be explained with following Example
Example
A
company has following information
ABC company
EPS for 2012 = .20
XYZ company
EPS 2012 = .25
XYZ company
market price for both year was = 20
Calculate
the PE ratio
Solution
P/E
Ratio = Market Price/EPS
Company
ABC = 20/.2 =100
Company
XYZ = 80
above
example shows that despite the earning of company ABC is low, but still it has
market value of 20, this is because of high future prospectus of the company ,
which is reflected by the high PE ratio.
