Price/Earnings ratio or simply P/E ratio
The price to earnings ratio (P/E) is the relationship that the price of a share bears with its earnings per share (EPS), either current or potential.
The formula is: P/E Ratio = Price/EPS
For example, if a share is selling at RM10 and is currently earning 50 cents per share, the P/E ratio for that share is
Price/EPS = 10/0.5 = 20
The P/E Ratio is often used to calculate the value of a share but is a subjective test. Some people could consider a P/E ratio of 20 is too high while others would think it was just right. However, as a rule of thumb P/E ratio not more than 15 shall be fine and meaning the stock is not too expensive. To further justified it, we may compare with its peer industry. How about P/E ratio too low, say P/E ratio less 2. Then, further fundamental of the particular company need to be further access as market may rate this company is worthless to invest.
Where to get P/E ratio? This can be easily find from web, newspaper, online trading account and many more. However, due to market volatility, P/E ratio was changed from time to time. Thus, certain period of P/E ratio, say 5 years or 10 years, need to be find out in order to know properly for the company performance. This is to eliminate those seasonal effect which affect the particular company performance.
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