The basic formula used to calculate P/E Ratio is:
P/E Ratio = Market value per share/ Earnings per share
To calculate the value, current stock price is divided by earning per share price.
For example, if the current market price of Maruti Suzuki is Rs 5000 and the Earning per share is 250, the P/E ratio will be calculated as:
P/E= 5000/250= 20x
This indicates that the investors are willing to pay Rs 20 for every rupee earned by Maruti.
In essence, the P/E ratio indicates the amount an investor should invest in the company to receive one rupee of that company’s earnings.