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This is in fact a fairly simple one. P/E Ratio is a company’s share price divided by the earnings per share.

So, if a company’s shares are currently trading at £10 a share and if the earnings for the previous 12 months are £0.85 the share has a P/E ratio of 11.76.

The P/E ratio is mainly useful when comparing one share against another. So if Company A has a P/E ratio of 11.76 and company B has a P/E ratio of 5.4 then Company B is making more money per share than Company A.

It should be remembered that the earnings per share can be massaged – perfectly legally – and so some people prefer to take account of Price/Dividend Ratio or Dividend Yields.

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