Friday, June 22, 2012

Calculate Price to Earnings Ratio

A company has Earnings per Share (EPS) of $1.50, a cash flow per share (CPS) of $3.00, and a price /cash flow ratio of 8.0.What is its price to earnings (P/E) ratio?

Accounting Answer:

First, when approaching the type of problem, it is useful to list all the information that will be required to calculate the price to earnings (P/E) ratio.

EPS  =  $1.5

Cash Flow Per share =  $3

Price/Cash Flow Ratio = 8.0

P/E Ratio Formula =  Market Value Per Share/ EPS

Second, the next step will be to use the available information to calculate earnings per share. 

Price / Cash Flow Ratio of 8 =    Price Per Share / $3
Price Per Share            =          8 X $3 = $24

Use the Price to Earnings Equation for the final computation:

P/E Ratio =   Market Value Per Share/ EPS =  $24/$1.5 = 16

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