Price to earnings ratio
(PER).
The ratio of the equity value of a company to its accounting earnings (profit after tax).
The PER can be calculated either on a per-share basis or on the total equity value and total earnings, giving identical results.
Per share:
PER = Current share price ÷ Earnings per share.
On total values:
PER = Total equity value ÷ Total earnings.
For example if Company A's total equity value is $630m and its relevant earnings are $63m,
the PER = $630m/$63m
= 10.
The Price to earnings ratio reflects the market's perception of the risk and the future growth prospects of the company.
PERs can also be used as a very simple estimation or comparison model, for corporate valuation.
In another case, say comparable PERs for an unlisted Company B are 12, and Company B's relevant earnings are $10m.
The total value of Company B's equity can be estimated on this basis as:
12 x $10m
= $120m.
Sometimes written as P/E ratio or PE ratio.
Also known as price earnings ratio.
