Definitions 
The P/E ratio or price to earnings ratio is used to give an indication of how expensive shares are compared to the profit the company has made.
In order to calculate the P/E ratio of any share simply do the following:
- Find out the net profit after tax of the company
- Divide this by the number of shares in issue. This gives the earnings per share.
- Get the price of one share
- Divide this by the earnings per share, to give you the P/E ratio.
Example: Calculating the PE Ratio
For example, if the net profit of a company is $100m, and there are 10 million shares in that company in issue, the earning per share are 10$. If the cost of 1 share is currently $35, then we calculate the PE ratio to be 35/10 = 3.5.
PE Ratio and Value for Money
The PE ratio gives us an indication of how cheap or expensive shares are with respect to their declared earnings. This is (of course) a completely different question from whether or not a share is good value for money.
For example, let us imagine a company that made an exceptional profit by selling off part of its business in one year. This is likely to result in a lower PE ratio than normal since investors realise that the extra profit in question is not likely to be repeated in the following years.
