This video discusses the Price-Earnings Ratio.

The Price-Earnings, which is also known as the P/E Ratio or the Price to Earnings Multiple, is calculated by dividing a company’s market value per share by the company’s earnings per share. To find the market value per share for a publicly-traded company, you just look up the company’s stock price. The earning per share can be either the earnings per share for the past 12 months (if you use this, the ratio is called a trailing P/E Ratio) or the earnings per share expected to occur over the next 12 months (if you use this one, the ratio is called a forward P/E Ratio).

If a company has a stock price of $80 and earnings per share of $4, the P/E Ratio is 20. People would say the company trades at twenty times earnings, which means one dollar of earnings “costs” twenty dollars.

Two companies might have different P/E Ratios if they have different levels of risk (i.e., if one company has a higher cost of equity capital) or if one of the companies is expected to grow at a faster rate.