The "daily Call" From Option Alpha: Options Trading | Stock Options | Stock Trading | Trading Online

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to walk through a simple explanation of price to earnings ratio or what's commonly referred to as a PE ratio. Price to earnings ratio is basically exactly what it sounds like. You take the share price of the company and you divide the share price of the company by the earnings that the company is generating over the course of in most cases, say a year, so adjusted earnings for the last year. And when you get that, you get a ratio that ends up being a number and that number helps you determine whether a company is highly valued based on their share price earnings or maybe a low value compared to their share price and earnings. For example, if a company right now is trading at say $20 and they earned $5 per share per year, then the PE ratio for that company would be $4 and for some people, that might be a really low PE ratio. It might again, signal to the market that that company is undervalued because