Key points from ISA 200 (Overall objective of independent auditor and the conduct of an audit in accordance with ISAs

price/earning ratio – meaning and formula

Price /earning ratio (P/E) ratio is key stock market ratio. It is a measure of the company’s current share price (market price) in relation to the earning per share.

Price earning ratio is calculated as follows:
(P/E) ratio = market value of share /earning per share

The price/earning ratio can be used by investors to assess whether the shares of the company appear expensive or cheap. A high price/earning ratio usually indicates that the stock market expect the strong performance from the company in the future and the investors are therefore prepared to pay the high multiple of historical earning to buy the shares.

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