How to Calculate a P/E Ratio. If you're going to play the market, you will need to learn the lingo. Here is how to determine a stock's P/E (price-earnings) ratio.
Look up the latest price for the common stock for which you wish to calculate a price-earnings ratio.
Find the company's 10Q and 10K (quarterly and annual) reports on FreeEdgar, a Web site offering documents that public companies file with the Securities and Exchange Commission. The reports contain quarterly earnings data.
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Look up earnings-per-share data for each of the previous four quarters.
Make sure you are looking at primary earnings per share from continuing operations before extraordinary items and accounting changes.
Add the earnings-per-share figures for each quarter to derive an annualized sum.
Divide the stock price by the annualized earnings-per-share figure. The result of this calculation is the P/E ratio.
Compare the ratio with P/E ratios of other companies in the same industry.
Try to find out why the ratio is different from that of peer companies. You may need to delve into 10K and 10Q reports, read news stories about the company and check out analysts' research reports.
Use the ratio to help you make investment decisions. A relatively high ratio might indicate the stock has strong growth potential but has had thin earnings; a low ratio might mean the stock isn't highly risky but has limited growth potential.
The stock tables in most newspapers carry up-to-date P/E ratios based on the most recent closing price of the stock, so you needn't calculate the figure yourself.