Analyzing a stock's price-to-earnings ratio, or P/E ratio, is one way to assess its value. As the U.S. Securities and Exchange Commission (SEC) indicates, a P/E ratio is simply a company's stock price relative to its earnings per share. Generally speaking, investors expect stocks with big P/E ratios to grow their earnings quickly and consistently. Going the extra mile and calculating a company's P/E ratio makes sound financial sense, just as reading labels at the grocery store exhibits keen nutritional mettle.
Locate the current stock price of the company whose P/E ratio you would like to calculate. You can find stock prices in newspapers or at countless websites. Most websites allow you to look up a company's ticker symbol by name if you do not know it.
Access the company's latest earnings per share (EPS). You can usually find a company's EPS as part of its stock quote. Many sites allow you to view a "detailed quote" that provides information beyond stock price and number of shares traded. Alternatively, you can look up the company's latest quarterly or annual report at the website EdgarOnline. A free trial gives you access to these documents, which contain detailed financial data, including EPS.
Divide the company's current stock price by its EPS and you have its P/E ratio. For example, on November 3, 2010, Apple (symbol: AAPL) closed at a price of $312.80. It's latest EPS, as of that date, was $15.15. When you divide the stock price, $312.80 by Apple's EPS, $15.15, you end with a P/E ratio of 20.65.
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