Ask Joey ™ a Question

How to calculate the price-to-earnings ratio (P/E ratio)?

The P/E ratio is most commonly used for the valuation of equity securities. The rationale for this is that earnings are the key driver of the investments value.

Below is an example of how to calculate the PE ratio for two difference companies. As you can see, a higher share price isn’t always a good thing. Comparing the trading multiple will help you understand how the stock is trading relative to its peers.

You might also be interested in...

  • What is the relationship between volume and variable cost per unit?

    If the variable cost per unit remains fixed, then any increase or decrease in unit volume will result in an increase or decrease in total variable costs for a business. For example, if variable cost per unit was steady at $5, then if unit volume were to increase from 100 to 200 units, then total […]

  • How can variable sampling risk impact the efficiency or effectiveness of an audit?

    Audit risk is comprised of inherent risk, control risk, and detection risk. The level of substantive testing that the audit performs is based on detection risk, which is set after the audit team assesses inherent risk and control risk. Variable Sampling – Substantive Testing When the audit team is performing substantive testing, they will use […]

  • What happens if control risk is set too high or too low?

    Audit risk is comprised of inherent risk, control risk, and detection risk. Depending on how the audit team assesses control risk, they would set detection risk, which determines the level of substantive testing that should be performed. To assess control risk, the audit team would use attribute sampling to determine if the controls were operating […]