The earning produced by a company is quite important and calculating the relationship between the stock price and P/E ratio is something every investor should learn. The P/E ratio is not the only measure of how well a company is doing however; there are many other factors that can determine this. However in using the relationship between calculating the P/E ratio based on stock price, you can analyze how well the company is doing. The P/E ratio takes into account the past 12 months of the company earnings.

By having calculated the actual stock price that you paid for the stock, you can figure out what the P/E ratio is. The stock price can be figured out by finding out what the market capitalization of the shares is and dividing this by how many shares are sold. After this number is found out, you can then calculate the P/E ratio. The P/E ratio is the calculated stock price divided by the earnings per share.

In theory, the company stock with a great P/E ratio tells an investor that they should buy stocks in this company and that the company is stable and making a profit. However the P/E ratio should just be used as a guidelines and instead review the company's prospectus is a better indicator of the stability of the company.

Another way in which Market Analysts use the P/E ratio is that a good P/E or ratio of the stock price to the Earnings per Share will determine the growth of the company for the next quarter or maybe even the next 4 quarters.

With calculation the stock price and using this to calculate the Earnings per Share Ratio, you can detect if the stock you would like to buy is expensive or very cheap. The stock price might be inflated or undervalued and the results of the Earnings per Share Ratio will tell you this if you know how to properly analyze the market.

Calculating the stock price and the earnings per share ratios are indeed value tools to employ as an investor.