The P/E ratio is an important factor which decide on how many years will be required to or the investor to be able to get back his complete investment from the annual earnings of the firms.

If you have invested $10 in the stock, and if the stock will earn $1 per share each year, then you can get back your investment in 10 years.

This calculation is based on an assumption that the earning per share will be constant at $1.

The P/E Ratio of the companies, which are listed on the stock exchange, can also be estimated by dividing the company’s market capital (as calculated above) by its annual earnings.

The P/E Ratio = Total market cap/Annual profit.

The P/E ratio is also an important factor which will help you compare the different companies which are working in the same industry, like the real estate companies and communication industry companies.

The company which has a lower P/E ratio will mostly be considered as more attractive than the company which has a higher P/E ratio.

Yet another method of assessing the P/E ratio will be to divide the share price by the earning made per share.

These figures are mostly available in the company websites and the stock exchange platforms and in the economic sections of different newspapers.

You have to calculate your profit per share by dividing the annual profit by the number of outstanding shares:

Profit per share = Annual profit/Outstanding shares.

P/E ratio = Stock price/Profit per share.