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

The price/earnings (P/E) ratio is a fundamental financial metric used to evaluate the valuation of a company's stock. It is calculated by taking the market price of a company's share and dividing it by the company's earnings per share (EPS). This ratio provides investors with insight into how much they are paying for each dollar of the company's earnings, which can help assess whether a stock is overvalued, undervalued, or fairly valued relative to its earnings.

The P/E ratio serves as a barometer of market expectations regarding a company's future growth. A higher P/E might suggest that investors expect future growth, while a lower P/E might indicate that the market has lower growth expectations for the company.

In contrast, the other options do not accurately represent how the P/E ratio is calculated. While they pertain to aspects of company performance or valuation, they do not formulate the P/E ratio directly. For example, annual earnings divided by total assets misrepresents the concept of earnings versus asset utilization, while the dividend per share divided by stock price pertains to dividend yield rather than earnings. Lastly, calculating company profits divided by the number of outstanding shares is related to deriving earnings per share, not the P/E ratio itself.