price-earnings ratio

The ratio of the market price of a common stock to its earnings per share.

A measure of the price-to-earnings ratio (P/E) using forecasted earnings for the P/E calculation. While the earnings used are just an estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E analysis. The forecasted earnings used in the formula can either be for the next 12 months or for the next full-year fiscal period.



Also referred to as "estimated price to earnings".

Investopedia Says:
The estimated P/E of a company is often used to compare current earnings to estimated future earnings. If earnings are expected to grow in the future, the estimated P/E will be lower than the current P/E. This measure is also used to compare one company to another with a forward-looking focus.

Related Links:
Learn what the price/earnings ratio really means and how you should use it to value companies. Understanding The P/E Ratio
The math may be simple, but to make informed investment decisions, investors need to understand the many varieties of EPS and what each represents. Types Of EPS
Explore the controversies surrounding companies commenting on their forward-looking expectations. Can Earnings Guidance Accurately Predict The Future?
Companies can manipulate their numbers, so you need to learn how to determine the accuracy of EPS. How To Evaluate The Quality Of EPS

Price of a stock divided by its basic earnings per share. The P/E ratio may either use the reported earnings from the latest year (called a trailing P/E) or employ an analyst's forecast of next year's earnings (called a forward P/E). The trailing P/E is listed along with a stock's price and trading activity in the daily newspapers. For instance, a stock selling for $20 a share that earned $1 last year has a trailing P/E of 20. If the same stock has projected earnings of $2 next year, it will have a forward P/E of 10.

The price/earnings ratio, also known as the multiple, gives investors an idea of how much they are paying for a company's earning power. The higher the P/E, the more investors are paying, and therefore the more earnings growth they are expecting. High P/E stocks-those with multiples over 20-are typically young, fast-growing companies. They are far riskier to trade than low P/E stocks, since it is easier to miss high-growth expectations than low-growth predictions. Low P/E stocks tend to be in low-growth or mature industries, in stock groups that have fallen out of favor, or in old, established, Blue-Chip companies with long records of earnings stability and regular dividends. In general, low P/E stocks have higher yields than high P/E stocks, which often pay no dividends at all.

Price of a stock divided by its earnings per share, also known as the multiple. The P/E ratio may either use the reported earnings from the latest year (called a trailing P/E) or employ an analyst's forecast of next year's earnings (called a forward P/E). The trailing P/E is listed along with a stock's price and trading activity in the daily newspapers. For instance, a stock selling for $20 a share that earned $1 last year has a trailing P/E of 20. If the same stock has projected earnings of $2 next year, it will have a forward P/E of 10.

Relationship between the current price of a stock to the earnings over any earnings period. Also known as the P/E ratio. The period in question can be the most recent quarter, annualized earnings, next year's projected earnings, and so on. The P/E is calculated by dividing the current stock price by the earnings per share.

The P/E ratio, also known as the P/E multiple, measures corporate earnings power and is used by investors to gauge market demand for stocks. The ratio is calculated by dividing the market value by earnings per share for the most recent 12-month period. Companies with a high P/E have greater earnings potential than low P/E stocks, but also are more volatile and somewhat riskier investments.

The price/earnings ratio (P/E ratio) provides a comparison of the current market price of a share of stock and that stock's earnings per share, or EPS (which is figured by dividing a company's net income by its number of shares of common stock outstanding). For example, if a company's stock sold for $30 per share and it posted earnings per share of $1.50, that company would have a P/E ratio of 15. A company's P/E ratio typically rises as a result of increases in its stock price, an indicator of the stock's popularity.

"The price-earnings ratio is part of the everyday vocabulary of investors in the stock market," noted Richard Brealey and Stewart Myers in Principles of Corporate Finance, because a company's P/E ratio is often viewed as an indicator of future stock performance. "The high P/E shows that investors think that the firm has good growth opportunities, that its earnings are relatively safe and deserve a low capitalization rate, or both." John B. Thomas observed in the Indianapolis Business Journal, however, that "while accepting that a high P/E ratio is usually a sign of high expectations, analysts and brokers nonetheless are quick to caution that the ratios are only part of the puzzle." A company may post an artificially high P/E ratio as a result of factors that can either boost stock prices or diminish earnings per share. Restructuring charges, merger and acquisition rumors (whether true or false), and high dividend yields all have the capacity to push a company's P/E ratio upward. In other instances, legitimately high P/E ratios can be adversely impacted down the road by such factors as market conditions, technology, and increased competition from new rivals (who may, in fact, be drawn to the industry by the company's previously posted P/E ratios).

Conversely, while a low P/E ratio is often a good indication that a company is struggling, appearances can again be deceiving. In addition, different industry sectors often have diverse P/E ratio averages. A company may have a fairly low P/E ratio when compared with all other corporations; when compared with the other companies within its industry, however, it may be a leader. Finally, a company that posts a loss has no earnings to compare with its stock price. As a result, no P/E ratio can be determined for the company. Still, these companies may remain viable choices for investment if an investor decides that the company under examination is headed toward future profitability. Since so many factors can influence a company's P/E ratio, industry analysts caution against relying on it too heavily in making investment decisions.

Earnings Per Share (EPS)

Earnings per share is one of the two factors that determine a company's P/E ratio; the other is the price of the company's stock. EPS is derived by dividing a corporation's net income by the number of shares of common stock that are outstanding. A company with 30,000 outstanding shares of common stock and a net income of $270,000 would thus have an earnings per share of $9.

An essential part of determining the P/E ratio, earnings per share has also come to be regarded as an important piece of information for the investment community in and of itself. "A primary concern of investors is how profitable a company is relative to their investment in the company," wrote Jay M. Smith, Jr., and K. Fred Skousen in Intermediate Accounting. "The investor is concerned with how net income relates to shares held and to the market price of the stock…. Only by converting the total amounts to per share data can a meaningful evaluation be made," because EPS figures can illustrate the degree to which a company's net income is keeping pace with its capital structure. In recognition of the importance of this information, corporations are required to report EPS amounts on their income statement (privately owned companies are under no such obligation).

Further Reading:

Brealey, Richard, and Stewart Myers. Principles of Corporate Finance. McGraw-Hill Book Company, 1984.

Smith, Jay M., Jr., and K. Fred Skousen. Intermediate Accounting. South-Western Publishing Co., 1987.

Smith, Richard L., and Janet Kiholm Smith. Entrepreneurial Finance. John Wiley, 2000.

Thomas, John B. "P/E Ratios Driven by Variety of Factors, Carry Variety of Meanings," Indianapolis Business Journal. May 23, 1994.