From the course: Finance Foundations

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Price-earnings ratio

Price-earnings ratio

From the course: Finance Foundations

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Price-earnings ratio

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The final widely used ratio that we're going to talk about here is the price-earnings ratio. Now note, earnings means the same thing as net income. The price-earnings ratio reflects how valuable a company's current earnings are. From the standpoint of an investor, your concern is whether that profitability is going to grow or shrink in the future. This expected future earnings growth is what is reflected in the price-earnings ratio. Now the price-earnings ratio is computed as the market value of the company shares divided by the company's net income. Market value of a company's shares is sometimes called the market capitalization or market cap. This is the amount you would have to pay to buy 100 percent ownership of a company. Now, in mid-2018, if you wanted to buy all the shares of Walmart, you would have had to pay $280 billion. If you had some extra money to spend, you could buy Apple for $1.1 trillion. A side note, Apple is the first publicly traded company in history to exceed…

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