A P/E ratio may be established and used as a method of valuing the shares of an unquoted company, but it is a facility to read too much significance into the P/E ratio or quoted companies. The EPS is determined by the success (or otherwise) of a company‟s
management, and the share price on the market is determined by many factors (dividends, growth prospects, government policy, the economic situation e.t.c.) of which the EPS is only one. The P/E ratio is therefore an interesting and useful measure of comparison, but it does not of itself possess any inherent significance which is used by investors to fix share prices.
Comment on the view that the price/earnings (P/E) ratio is an “attempt to value a company in terms of its earnings”.
