Learning about shares: Minding your P's and E's

Dan Dividend responds: This is one of the questions I'm asked most often. It's not surprising, as P/E ratios get bandied about among seasoned investors in many a dinner-table discussion. P/E is an important sharemarket measure that new investors should understand, too. It's recorded in the far-righthand column of the sharemarket table.

Basically, the P/E ratio shows the relationship between a company's share price and its earnings (or profits). To calculate P/E, you divide a company's share price by its earnings per share: the price side of the ratio is the share price at the end of the most recent trading day (as reported in the "last sale" column of the sharemarket table).

The earnings or EPS side is the company's last reported full-year earnings divided by the number of shares in the company. It shows how much the company has earned for each of its shares.

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