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P/E ratio explained. I explain very simply, exactly what is the price to earnings ratio. The P/E ratio is exactly as it sounds, the price of a stock compared to the earnings per share of a stock. The price of a stock like Apple is $190 per one share. The EPS or earnings per share of Apple stock would be $12.50. We get the EPS by dividing their profits by the number of outstanding shares there are of that company. Dividing the price of 190 by the EPS of 12.50, we get a P/E Ratio of 15. What does the price to earnings ratio tell us about a company? The P/E ratio tells us how much we’re paying for the stock, in relation to how much profits they earned in the past year. For Apple, we’re paying 15 times what they made in profits. Another way to think of it is this, for every $1 Apple made in profits, we’re paying $15, or the P/E ratio number. The P/E ratio tells us how much profits a company is making compared to another company. If Facebook stock has a higher P/E Ratio, they are not as good of a value compared to Apple stock, because we’re paying more money for a stock that makes less profits. This ratio is one number of many you can use to value a stock, but you should not use one number to value a company in the stock market. Use this ratio as a stepping stone to valuing stocks.