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Horngren'S Financial And Managerial Accounting
Found in: Page 707

Short Answer

What is the price/earnings ratio, and how is it calculated?

P/E Ratio also known as the price multiple, or the earnings multipleis computed by dividing the stock’s market price by the earnings per share.

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Step by Step Solution

Step 1: Introduction to topic

The P/E ratio differs across industries and therefore, should either be contrasted with its companions having a similar operational activity of comparable size or with its historical P/E to assess whether a stock is undervalued or overvalued.

Step 2: The price/earnings ratio

The price/earnings ratio is the financial ratio of the market price of a share of common stock to the corporate's earnings per share. It is calculated by taking the market price per share of common stock and dividing it by earnings per share.

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