P/E Ratio =     Stock Price
                          Earnings per Share

The P/E Ratio represents the multiple of a stock’s price over its earnings per share.  A stock with a high P/E (of around twenty or above) usually has high expected earnings growth as well.  The future earnings expectations are necessary to justify the high price relative to current or historical earnings.

A lower P/E (for example, a number closer to ten) may indicate that a stock is a bargain; although, it may also indicate some serious problem that is keeping the stock price down.

If earnings are particularly high or low due to some passing or one-time event, then the P/E may be thrown off or need adjustment.  If the stock price remains about the same, then you may attempt to adjust the financial effect of the unusual event out of EPS.  You can then use the adjusted EPS to calculate a more meaningful P/E.

Other times, the stock price will actually adjust to an anomalous change in earnings per share.  When this happens, the stock may become a relative bargain or become overly expensive.

EPS and P/E are widely used measures of stock performance and value.  The fact that an individual event or a single year of earnings may so drastically alter these ratios (and therefore the stock price) can be problematic.  It does not necessarily make sense to base the price of a stock on just one year of earnings.