Tuesday 12 December 2017

Price/Earning Ratio or P/E Ratio

This is a company's stock price divided by its earnings per share over the previous twelve months.

Because earnings can be manipulated in many ways and because past earnings are a poor guide to future profits, a P/E ratio is an imprecise and often misleading guide to what the company is worth.

A "normalised" P/E ratio averages several years's worth of earnings to arrive at a somewhat more reliable number.

A "forward" P/E relies on analysts' expectations of earnings in the coming year to arrive at a nonsensical number.

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