Financial Thought of the Day August 19, 2014: The P/E Ratio

The price to earnings ratio, also known as the P/E ratio, represents the most commonly quoted valuation measure in the stock market. It's basically defined by the following formula: P/E= Market price per share/earnings per share. The quoted P/E ratio can vary slightly from one publication to another as some uses estimated earnings, trailing twelve month earnings, last year's earnings, etc, in the denominator. Some publications quote the P/E ratio of the S&P 500. If the P/E ratio of your company exceeds the P/E ratio of the S&P 500 then it may be considered overvalued by some.