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):
|P/E Ratio =||Market Value per Share|
|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 fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.
InvestingThe most common types of price to earnings ratios are forward P/E and trailing P/E. Find out how they differ and the advantages and drawbacks of each.
InvestingHere are three ratios that help investors value stock returns.
InvestingThe P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
InvestingThe estimated P/E of a company is often used to compare current earnings to estimated future earnings.
InvestingWe show you how to compute and analyze the P/E ratio for Netflix.
InvestingThese are some of the over-valued stocks based on P/E and Forward P/E ratios. Will the bubbles burst in 2016?