Price Earning Ratio is

$$Price\quad Earnings\quad Ratio=$$$$\frac { Market\quad price\quad Per\quad Share }{ Earning\quad Per\quad Share } $$

####

####

####

####

**a type of Profitability Ratio**that determines the**Market Price of share relative to its Earning Per Share.**It is a measure to check how well equity is priced in a market.$$Price\quad Earnings\quad Ratio=$$$$\frac { Market\quad price\quad Per\quad Share }{ Earning\quad Per\quad Share } $$

**Market Price Per Share is the price at which common equity is trading in the market.****Where,****And**$$Earning\quad Per\quad Share=$$$$\frac { Net\quad Profit }{ Total\quad Number\quad of\quad Common\quad Equity } $$## Significance and Interpretation

- PE ratio helps investors to determine the pricing standard of equities in the market,
**a higher PE indicates that a share is highly-priced with respect to its EPS.** **Investors are attracted by the lower PE ratio of stock**as it assures that the equity is priced correctly with respect to its EPS.

### Examples

####
**Example 1: **

**Given below are few details of M/S XYZ Ltd. and ABC Ltd., use them an calculate the PE Ratio for M/S XYZ Ltd and ABC Ltd. and decide which investment is better.**Particulars | (XYZ Ltd.) Amount (in Rs.) | (ABC Ltd.) Amount (in Rs.) |
---|---|---|

Equity Share Capital @ Rs 10.00 each | 5000000.00 | 5500000.00 |

Market Price Per Share | 40.00 | 10.00 |

EBIT (Earnings Before Interest and Taxes) | 4000000.00 | 2500000.00 |

Interest Expenses | 1000000.00 | 800000.00 |

Tax Payable | 500000.00 | 300000.00 |

####
**Solution:**

####
**1. XYZ Ltd.**

**Net Profit =**EBIT – Interest Expenses – Tax payable**⇨**Rs. 2500000

**Total Number of Common Equity =**5000000 / 10

**⇨**500000

**EPS =**Net Profit / Total Number of Common Equity

**⇨**2500000 / 500000

**⇨**Rs. 5

**PE Ratio = Market price Per Share / EPS**

**⇨**

**40/5**

**⇨**8

**Hence, Market Price per Share of XYZ Ltd. is 8 times the annual earning of the share.**

####
**2. ABC Ltd.**

**Net Profit =**EBIT – Interest Expenses – Tax payable

**⇨**Rs. 1400000

**Total Number of Common Equity =**5500000 / 10

**⇨**550000

**EPS =**Net Profit / Total Number of Common Equity

**⇨**1400000 / 550000

**⇨**Rs. 2.54

**PE Ratio = Market price Per Share / EPS**

**⇨**

**10/2.54**

**⇨**3.94

**Hence, Market Price per Share of ABC Ltd. is 3.94 times the annual earning of the share.**

__By comparing the PE Ratio for both the companies, it can be concluded that Shares of ABC Ltd. are more correctly priced as compared to shares of XYZ Ltd.__