The P/E ratio is calculated by dividing the price of the stock by the total of its that the Flying Pigs will have the same earnings per share in the coming year.
The stock prices just calculated are only short term values - a one year horizon. But let's think about the value of a stock over a nearly infinite.
The price-to-earnings ratio, or P/E, is arguably the most popular method for valuing a company's stock. The ratio is so popular because it's simple, it's effective.
By making a few assumptions, we can calculate what price a stock could that Twitter's price would have lost two-thirds of its value just two years after its IPO.
Learn how to calculate the market price per share of stock, which is the current measure of the price of one share of stock.
The equation above treats a stock's present value similarly to a perpetuity, because it is assumed the company's dividend payments are fixed.