The p/e ratio may appear like a complex term to understand, but many aspects of finance there is no high level mathematics associated with this term. The term p/e ratio refers to the price to earnings of a company at any given point in time. Understanding what this means and how its applied in financial analysis can potentially make you capital.

The way analysts calculate this ratio is by dividing the current price of a security or stock by the earnings per share. For example if a company has reported $15,000,000 in earnings and has 5,000,000 shares, the earnings per share would amount to $3. With this information and a chosen arbitrary stock price such as $4.00, you can divide $4 by $3 giving you 1.333.

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