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Earnings Ratio (PE Ratio)
This ratio compares the firm’s current share price with how much money each share is generating.

Earnings Ratio            Market Price per Share (pence/cents)
                        =          _________________ 

                                    Earnings per Share (pence/cents)

For example if a firm’s market price per share is £10 and the earnings per share is 50p, the earnings ratio would be calculated as follows:

Earnings Ratio            1000
                        =          ______            =          20

                                    50

The earnings ratio shows how many times the firm’s current share price is bigger than the earnings each ordinary share generates; or in other words how many times the firm’s current share price is bigger than earnings per share. Another way to describe the earnings ratio is that it shows how much money you need to spend on shares to make one pound/dollar from the shares you buy.

The earnings ratio will change as and when the market price for the firm’s shares changes. The number of times that the firm’s share market price changes (throughout the year) will depend on the firm, economic conditions and the industry that the firm is based in.

 

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