How is the price-to-earnings (P/E) ratio calculated?

The price-to-earnings (P/E) ratio is a widely used financial metric that expresses the relationship between a company's current share price and its earnings per share (EPS). This ratio is calculated by dividing the market value per share by the earnings per share.

This formula allows investors to evaluate how much they are willing to pay for each dollar of earnings. A higher P/E ratio may indicate that investors expect higher growth rates in the future compared to companies with lower P/E ratios. It is a key indicator of market expectations and provides insight into how the market values a company's profitability.

The other choices do not accurately represent the calculation of the P/E ratio. For example, subtracting earnings per share from the market value does not yield the P/E ratio but would instead give a different, non-standard measure. Dividing earnings per share by the market value also gives an inverse relationship that is not useful in this context. Lastly, multiplying the market value per share by earnings would result in a completely different measurement unrelated to the P/E ratio. Therefore, dividing the market value per share by earnings per share is the correct method to calculate the P/E ratio.