Below is some great content about different business valuation methods. If you are looking for some advanced modeling literature, I can highly recommend this modeling package which I have found extremely useful in helping me mastering both Excel and financial modeling - which works as a stable knowledge base in my investment banking carrier.

Price to Earnings ratio (P/E)

Price-Earnings Ratio or the P/E ratio is a price-to-earnings ratio and employed generally to determine the appropriate stock price of a company. This multiples is the most widely used and known of all multiples since it is very simple to calculate for most companies and makes comparisons simple, something that saves time and provides a good proxy of the fair value of a company. But P/E ratio is limited to apply to companies only with positive earnings and furthermore, volatility of earnings results in changes in the P/E ratio from period to period, which makes the P/E ratio less reliable. The simple calculation can be written as:

P/E = P/EPS

where P = share price and EPS = earnings (net income after tax) per share


Leave a Reply