How is the Price/Earnings (P/E) ratio calculated?

The Price/Earnings (P/E) ratio is a key financial metric used to assess the valuation of a company's shares. It is calculated by taking the market price per share and dividing it by the earnings per share (EPS). This ratio provides investors with insight into how much they are willing to pay for each dollar of earnings. A high P/E ratio may indicate that a company’s stock is overvalued or that investors are expecting high growth rates in the future, while a low P/E ratio might suggest that the stock is undervalued or that the company is experiencing difficulties.

The calculation method is straightforward: first, determine the current market price of a share of stock, and then find the earnings per share, which is typically calculated as net income divided by the number of outstanding shares. Dividing the price per share by the earnings per share gives you the P/E ratio, which can be a useful tool in comparing the valuation of different companies within the same industry or sector.

The other options listed do not accurately represent the calculation of the Price/Earnings ratio, focusing instead on unrelated financial metrics. For example, earnings per share divided by price per share would yield an inverse relationship that doesn't provide meaningful insights for investment evaluation. Similarly, dividing net income