Price Earnings Ratio

PE = market price/ EPS

PE ratio is the market price of the stock divided by its Earnings Per Share (EPS = net profit/ number of shares).

In the case of EPS, it is not so much a high or low EPS that matters as the growth in the EPS. The company's PE reflects investors' expectations of future growth in the EPS.

A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.