Every investor should know how to calculate the PE Ratio

Price-to-Earning Ratio

The price-to-Earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per-share(EPS). P/E ratios are used by value investors and analysts to determine the relative value of a company's shares. 

A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future. 

P/E Ratio Formula and Calculation

Analysts and investors review a company's P/E ratio when they determine if the share price accurately represents the projected earnings per share. The formula and calculation used for this process is;

P/E Ratio=Earnings per shareMarket value per share (stock price)​

To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS). 

P/E Ratio=Earnings per share (EPS)Market value per share (P)​

Example= Today's Price of Safaricom shares was Kshs 30.05

                  The Earnings per share for Safaricom was Kshs 1.84

Therefore the P/E ratio for Safaricom is currently at 16.332

Note: any P/E ratio below 20 signifies that the stock is still within good valuation and investors can still invest in the company. However, the P/E ratio should not be the only analysis that should enable you make a decision but it's a starting point.