November 10, 2008 - 12:44am — Administrator
The price/earnings ratio is the value multiple that is used most often in practice to apply the guideline companies'valuation approach. A company's price/earnings ratio expresses the relationship between the market price of the company's stock and its net income. It indicates what a knowledgeable investor is willing to pay for $1.00 of the company's net earnings. Using this method, a guideline company's stock price is divided by its earnings for a period of time to arrive at a value multiple. This multiple can then be applied to the earnings of the company being valued to arrive at an estimate of the value of the appropriate ownership interest.