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Price-earnings ratio (P/E multiple)

he price-earnings ratio (also called PE multiple or P/E) helps shareholders understand what their portion of a company’s ownership is worth.

The P/E ratio is calculated by dividing the current market price of common shares by the earnings per common share (EPS) for the latest reporting period.

Private and smaller businesses sometimes use this ratio as a rule of thumb to value a company.

The P/E ratio is only calculated for common shares.

More about the price-earnings ratio

In the example below, ABC Co. has $17,000 in earnings after tax and after preferred dividends. It has 100,000 common shares outstanding. This means it has an EPS of 17 cents ($17,000 / 100,000).

A check of its market price per share shows $1.70.

The price earnings ratio (P/E) is:

$1.70 per share
$0.17 per share
= 10

To establish a rough estimate of the value of a company, just multiply earnings after tax and after preferred dividends by 10—for example $17,000 x 10 = $170,000.

The P/E is a benchmark by which to value companies in the same industry.