What is Price/Earning Ratio?

I've seen this in MANY reports.. p/e ratio for short.. had no idea what is it, I usually just ignore it.
Laziness is my bad habit, time to take a step forward and forcing myself to believe that "ignorant is NOT bliss".

So let's have a scenario (I love scenarios...and analogies... and story-telling. People who know me well enough will know that).

There are two companies selling televisions- Firm A and Firm B. Firm A has it's stocks priced at $50 per share and Firm B has it's stocks priced at $100 per share. Does this means that Firm B would be a better buy?

Well after doing some research, I learnt that price/earning ratio will help answer that question!

So what is p/e ratio?
P/e ratio determines the stock price per share relative to the annual earnings per share. Faster-growing and more-profitable companies generally has higher p/e ratios. P/e ratio helps to compare the price of a stock to the company's profits per share or the overall market's price level to overall corporate profits.

Below is the formula to calculate p/e ratio (most sites usually calculates this already.)


SP/AE = p/e ratio

SP = Stock price per share
AE= Annual earnings per share (this can be derived from taking the total annual earnings divided by the total number of stocks issued)