pe_ratio - Updated 03/21/2006 P/E Ratio Tutorial

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Updated 03/21/2006 P/E Ratio Tutorial http://www.investopedia.com/university/peratio/default.asp Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table Of Contents 1) P/E Ratio: Introduction 2) P/E Ratio: What Is It? 3) P/E Ratio: Using The P/E Ratio 4) P/E Ratio: Problems With The P/E 5) P/E Ratio: It's Not A Crystal Ball 6) P/E Ratio: Conclusion Introduction Chances are you've heard the term price/earnings ratio (P/E ratio) used before. When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics. Although a simple indicator to calculate, the P/E is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. As a result, investors often misuse this term and place more value in the P/E than is warranted. In this tutorial, we'll introduce you to the P/E ratio and discuss how it can be used in security analysis and, perhaps more importantly, how it should not be used. If you don't have a solid understanding of stocks and how they trade on the stock market, we also suggest that you check out our Stock Basics tutorial What Is It? P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS: (Page 1 of 5) Copyright © 2002, Investopedia.com - All rights reserved.
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Investopedia.com – the resource for investing and personal finance education. Market Value per Share P/E Ratio = Earnings per Share (EPS) Most of the time, the P/E is calculated using EPS from the last four quarters . This is also known as the trailing P/E . However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E . A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters. There isn't a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise. Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist. Historically, the average P/E ratio in the market has been around 15-25. This
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This note was uploaded on 05/17/2010 for the course BUS 001 taught by Professor Gra during the Spring '99 term at American University in Cairo.

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pe_ratio - Updated 03/21/2006 P/E Ratio Tutorial

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