The price-earnings ratio is calculated as which of the following?

• A. A Market capitalisation divided by net income.
• B. B Price per share divided by earnings per share.
• C. C Earnings per share divided by price per share.
• D. D Dividends per share divided by earnings per share.

Answer: (B)

The price-earnings ratio shows how much investors are willing to pay for each dollar of a company’s earnings. It is calculated by dividing the price per share by the earnings per share, giving a per-share valuation metric that lets you compare how richly stocks are priced relative to the earnings they generate.

So, price per share divided by earnings per share is the correct formulation. The other expressions mix in different concepts: earnings per share over price per share is the inverse of P/E, dividends per share over earnings per share is the payout ratio, and market capitalization over net income is an aggregate form that, while related, is not the standard per-share P/E expression.