Identification

Corporations with publicly traded stocks report their financial results quarterly, or four times per year. At this time, investors hold a high interest in the reported earnings per share (EPS)—the net income for the quarter divided by the total number of company shares outstanding. The total of four quarters earnings makes up the annual earnings per share, while the annual is the number reported by financial websites such as Yahoo Finance and Google Finance on the stock price screens for the individual companies.

Considerations

In all cases, P/E remains a relative value measurement. Investors can use it to check a company’s current P/E to the historic average, or they can compare P/E with that of competitors or the overall market, or analyze it in relation to the growth in earnings per share. Growth stocks have high P/Es, as investors bid up the share price to participate in the future growth of the company.

Types

The classic P/E ratio is based on trailing earnings, or the earnings from the past four quarters. This P/E ratio shows the relationship of the current share price to the previous year’s net earnings. Many investors like to look at the forward P/E—the current share price divided by the projected earnings for the next four quarters. The forward P/E gives the investor an idea of the company’s value based on its probable future profits. Not all companies can make the projected earnings, however, so forward P/E gives just a possibility of the stock’s future performance.

Significance

References

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