We can calculate the P/E ratio of company by dividing the market value price per share by the earning per share of the company.The price-to-earnings ratio is one of the most largely used stock analysis tools, used by the investors and analysts for determining the stock valuation. In addition to showing whether a stock price of a company is overvalued or undervalued, the P/E can show how a valuation of a stock compares to its industry group or a benchmark, like the S&P 500 Index.

The P/E ratio helps the investors to determine the market value of a stock as compared to the earnings of the company. In short, the P/E ratio shows what the market is ready to pay today for a stock, based on its past or future earnings.Earnings per share is the portion of net income of the company. It can be earned per share if all the profits were paid to its shareholders.

EPS provides the “E” or earnings portion of the P/E (price-earnings) valuation magnitude relation as shown below.

P/E Ratio = value per Share / Earnings per Share (EPS)

For example, as of the tip of 2017 Bank of America Corporation (BAC) closed the year with the following:

EPS = $1.56           

Price = $29.52

BofA’s P/E ratio was:

P/E = 18.92 or $29.52/$1.56

Bank of America’s higher P/E ratio means that investors assume higher earnings growth in the future compared to JP Morgan and the overall market.

But, no single ratio can tell you about all you need to know about a stock. Before investing, please use a variety of financial ratios in order to determine whether a stock is valued fairly and whether a financial health of a company justifies its valuation of a stock.

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