Master the P/E ratio calculation: a must-have course from beginner to investment expert

In stock investing, the Price-to-Earnings Ratio (PE ratio) is perhaps the most commonly heard yet easily confused concept. Investment advisors and analysts often ask, “Is this company’s PE ratio reasonable?” or “What is the current PE level?” but few investors truly understand how to calculate the PE ratio. This article will guide you to deeply understand the core logic of the PE ratio and learn how to use it to evaluate stock valuation.

What exactly does the PE ratio measure?

The PE ratio, also known as the Price-to-Earnings Ratio, abbreviated as PE or PER (Price-to-Earning Ratio), essentially answers a question: At the current price, how long will it take for the company’s profits to recover the investment cost?

Taking TSMC as an example, suppose the current PE ratio is around 13. What does this mean? It indicates that it would take 13 years for the company to earn enough to match its current market valuation, or it can be understood as investors buying at the current price need 13 years of earnings to break even.

The level of the PE ratio reflects the market’s attitude toward a company’s valuation:

• Lower PE → Stock price is relatively cheap, and the market offers a larger valuation discount
• Higher PE → Stock price is relatively expensive, and the market is optimistic about the company’s prospects, willing to pay a premium

PE ratio calculation: learn from scratch

Mastering the PE ratio calculation is not difficult; it boils down to two main approaches:

Method 1: Divide the stock price by earnings per share (EPS)