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

The price-to-earnings (P/E) ratio is a key financial metric used to evaluate a company's valuation relative to its earnings. It is calculated by taking the current share price of a company's stock and dividing it by the earnings per share (EPS). The EPS is derived from the company's net income divided by the number of outstanding shares, which reflects the profit allocated to each share of common stock.

This method of calculating the P/E ratio provides investors with insight into how much they are willing to pay for each dollar of earnings. A higher P/E ratio may indicate that investors expect future growth in earnings, while a lower P/E might suggest that the stock is undervalued or that the company is experiencing challenges.

To clarify why the other options do not accurately describe the P/E ratio: dividing the current share price by the market share does not relate to the company's earnings directly. Total earnings divided by total shares refers to calculating EPS, but not the P/E ratio itself. Lastly, net income divided by total assets is a ratio that assesses a company's profitability relative to its total assets, known as return on assets (ROA), and is unrelated to the calculation of the P/E ratio.