The price-to-earnings ratio measures a company’s current share price relative to its per-share earnings. This definition includes extraordinary items from EPS calculation.

The PE ratio is among the oldest and most used ratios in finance. Its importance is crucial in the dividend discount model, which states that the current price is the sum of all the discounted future cash flows. In its simplest form:

P = D/(r-g)

With P today stock price, r discount rate and g constant dividend growth.

Because not many companies pay a substantial dividend and dividends cannot be sustainably higher than earnings, the latter is often used as a proxy for dividends.

A relatively low PE ratio shows what the market is discounting poor future earnings growth, while a high PE means that the market is discounting high future earnings growth.

Because this factor is heavily influenced by the company's leverage, operational risk and profitability, it is best suited to compare stocks of the same industry.

Formula

PEInclXor = Price / EPSInclXor

If EPS is negative it returns NA

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