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Price/Earnings Ratio is, fundamentally, the stock price divided by the Earnings per Share (EPS). 10.00, you have a P/E of 8 then. (Price divided by P/E Ratio gives Earnings. 1.25. EPS times P/E provides you the price. P/E Ratio, 12 months they are employing the current stock price and EPS quotes for the current financial. The Trailing P/E Proportion is using the current stock EPS and price for the last financial season.

There are variations with this with Forward P/E Ratios using current stock price and next 12 months of EPS and Trailing P/E Ratios using current stock price and last a year of EPS. On my spreadsheets, I estimate Price/Earnings Ratios for Closing, High, Low and Median stock price for each financial year.

My median stock price is the median of the high and low stock prices for every financial year. When I give a current P/E Ratio, I am using current stock price and EPS quotes for the existing financial calendar year. ONCE I give trailing P/E ratios, I am using the current stock price and EPS for the last financial year. In order to see if the current P/E ratio is an acceptable one, It really is compared by me to P/E ratios I computed over the last 5 financial years. The stock price is most likely reasonable if the current P/E ratio is just about the median P/E ratio of the past 5 years.

It is also valid to compare a company’s current P/E to current P/E ratios of similar companies. I also like to compare the 5 calendar year median Price/Earnings ratios for high and low stock prices to the current P/E proportion to get an idea if the existing price is relatively high or relatively low.

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Realistically, while it is nice to pay a low price for a stock, getting one at an acceptable price is more achievable probably. When comparing P/E ratios, you will need to compare trailing P/E ratios to trailing P/E ratios, and current P/E ratios to current P/E ratios. Remember current is also known as forwards or leading P/E.

In a rising (bull) market, the trailing P/E ratios tend to be greater than the existing P/E ratios and the opposite in a falling (bear) market. A financial year for an organization is extracted from the day of their annual financial statements. Most companies use the calendar year. A season starting 1 January and ending 31 Dec That is. Some companies have non-calendar financial years. Our banks are examples of this. The TD Bank’s (TSX-TD) financial calendar year starts 1 November and ends 31 October every year.

Others, like Canadian Tire (TSX-CTC.Sunday to 31 Dec A) have financial years finishing on the closes. As I am aware Price/Earnings Ratios, 10 and below is consider low, 15 – 20 is known as normal and 25 or 30 is known as high. This is just a rule of thumb. However, companies like utility companies generally have low P/E Ratios and tech companies tend to have high ones. Also, mature companies tend to have lower P/E ratios than growth companies.

When companies differ from a growth company to a mature company, their P/E ratios will tend to come down. Also, for some companies, investors are willing to pay an increased price (or a premium) because of its stock. This will result in higher P/E Ratios that similar companies have. This may happen for various reasons.

There are, of course, problems with this ratio. The earnings part of the proportion is quite a fake amount. This is because, for the P/E ratio to mean anything, all companies, across all industries have to calculate earnings in the same way. Earnings also appear to be a value that may be more easily manipulated that say cashflow.

So, perhaps it isn’t a good idea to put too much weight on the wages value. I believe that the Price/Earnings Ratio is one valuable tool for identifying if a company’s stock price is reasonable or not. However, I do not think that it ought to be the thing you need to use.