Price Earnings (P/E) Ratio

Is closely related to the earnings yield/earnings price ratio. It is actually the reciprocal of the latter. This ratio is computed dividing the market price of the shares by the EPS. Thus,

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The P/E ratio reflects the price currently being paid by the market for each rupee of currently reported EPS in other words, the P/E ratio measures investors expectations and the market appraisal of the performance or a firm. In estimating the earnings, therefore, only normally sustainable earnings associated with the assets are taken into account. That is, the earnings are adjusted for income from, say, discontinued operations and extraordinary items as well as many other items not expected to occur. This ratio is popularly used by security analysts to assess a rums performance as expected by the investors.

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