Price-to-earnings ratio = share price ÷ annual earnings per share (EPS)
Calculation, the share price is usually taken as the latest closing price, and EPS, if the published EPS of the previous year, known as the historical P/E ratio; calculation of the estimated P/E ratio of the EPS estimate, generally using the average market estimates (consensus) estimates, that is, tracking the performance of the organization to collect a number of analysts forecasts to obtain the average or median estimate. EPS estimates used to calculate the estimated price-earnings ratio, generally using the market average estimates (consensusimates), that is, tracking the performance of the company's institutions to collect a number of analysts' forecasts to get the average or median estimate. There are no guidelines for what constitutes a reasonable price-to-earnings ratio.
The price-earnings ratio is the ratio of a stock's market price per share to its earnings per share. Widely talked about in the marketplace, the P/E ratio usually refers to a static price-to-earnings ratio, which is often used as an indicator of whether a stock is overvalued or undervalued at different prices. The P/E ratio is not always accurate when used to measure the quality of a company's stock.
It is generally believed that if a company's stock has an overly high price-to-earnings ratio, then the stock is priced in a bubble and is overvalued. When a company is growing rapidly and future earnings growth is very favorable, when using P/E ratios to compare the investment value of different stocks, these stocks must be in the same industry because at this point the companies' earnings per share are closer to each other for comparisons to be valid.
Expanded information:
In the international market, to examine the value of the investment of a stock, the most typical is not the price-earnings ratio, but to use the price-earnings ratio/growth rate of this indicator as a standard. Generally speaking, as long as the price-earnings ratio/growth rate <1, the stock is seen as the existence of a reasonable price. China's stock market in the constituent stocks, the growth rate of its average in more than 50%, then, in China's stock market, a 50 times the price-earnings ratio is absolutely reasonable.
Another way of looking at it is that since interest rates are around 3%, a P/E of 33x means that it matches the level of interest rates, and a growth rate of 50% would make a 50x P/E stock 33x P/E a year from now, which therefore disproves that a 50x P/E is reasonable for Chinese stocks.
Reference Source Baidu Encyclopedia - Price Earnings Ratio