Stock prices are constantly fluctuating and the P/E ratio of a company fluctuates with them. When choosing a market price to use in your calculation, don’t worry about choosing any averages, highs, or lows of the stock price; the current price will work fine. The only time you need to choose a specific price is when you are comparing the P/E ratios of two different companies. In this case, the chosen approximation, whether it is the opening price on a certain day or the current price at this minute, should be found in the same way for both companies.
EPS is usually provided on finance websites as a part of a freely available stock report and is easy to find with a web search. If you want to calculate EPS yourself, however, the formula is generally as follows: (Net Income - Dividends on Preferred Stock / Average Outstanding Shares of Common Stock). Note that some sources use the number of shares being traded at the end of the period rather than the average over the period. [5] X Research source Because of slight variations in formula, different sources may report different EPS values for the same company. However, these are generally averaged together to produce an average EPS. [6] X Research source
We have the first part of our equation, the numerator, or 35. 14 We’ll need to calculate Yahoo!’s EPS. You can just type “Yahoo!” and “EPS” into a search engine if don’t want to calculate EPS yourself. As of November 5, 2015, Yahoo!’s EPS was $. 25 per share. Divide 35. 14 by . 25 to get 140. 56. Yahoo!’s price-earnings ratio is approximately 141. [7] X Research source
For example, Stock ABC is trading at $15/share and has a P/E of 50. Stock XYZ is trading at $85/share and has a P/E of 35. It’s cheaper, however, to buy Stock XYZ, even though its share price is higher than Stock ABC’s. That’s because with Stock XYZ, one pays $35 for every $1 of earnings, whereas with Stock ABC, one pays $50 for every $1 of earnings. Understand that it is useless to compare P/E ratios between unrelated companies. Because valuations and growth rates vary widely between industries, the companies compared must be very similar in both size and sector to be comparable using P/E ratios. [9] X Research source
Conversely, a low P/E may represent a company that either is undervalued or is doing better now than it has been doing in recent years. In other words, the P/E should not be the sole determining factor in deciding whether or not to buy a stock. [10] X Research source
Keep in mind that, assuming good economic conditions and successful management, the company that takes on more debt, and thus has a lower P/E, can experience higher earnings because of the risky debt it has incurred. [12] X Research source
