How to Calculate a PE Ratio

A price to earnings ratio is the most basic calculation of a company's value. A business that makes $20,000 a year and one that makes $10,000 are not necessarily better or worse than each other. Value investors love the PE ratio because it gives them a sense of how much of a deal they're getting. Anything in the 20 to 25 range for a PE ratio is acceptable; once it gets above 30, 35, 40, then it's too expensive.