How to use P/E as a valuation tool
StockChart
ratio of the stocks price and the stocks earnings per share. To
calculate a P/E, take the price of the stock and divide it by it's
earning per share.
Example: Stock Price $20, Earning Per share $2, gives a P/E 10.
Types of P/E, Individual and Collective
P/E can be calculated for an individual stock as well as for the
overall market. To calculate P/E for the overall market, investors
typically use DJIA and the S&P 500.
To calculate the market P/E in the DJIA, the investor must use the
value of the DJIA divided by the earnings of its 30 components.
Trailing P/E
Trailing P/E, is when historical values are used, this does not give
an indication of future performance, but does give the investor an
idea of the stocks historical value which then can be compared to it's
current P/E or projected P/E's. Trailing P/E ratio's are commonly used
in newspapers.
Projected P/E
Projected P/E uses the current stock price divided by the stocks
projected earnings per share. Projected earnings are generally
provided in company research reports. Projected P/E should be used
with care, since it is based on estimated earnings.
Relative P/E
The relative P/E ratio is a ratio between the current P/E and
historical P/E's. A relative P/E has a numerical range of between
0-100%, representing the all time low (0%) to the all time high (100%)
P/E.
For example: if a stock has historically traded with a P/E range of
10-20, and the current P/E is 20, than the relative P/E would be 100%.
If the stock's P/E is 15, the relative P/E would be 75% (15 / 20 =
0.75 or 75%0 ). Some investors believe that trading in the high range
of a stock's relative P/E is not considered safe since it could be
considered overvalued.
Historical P/E's are not always accurate since they do not account for
large events, like in 1992, which followed a large recession, when a
large portion of companies wrote off assets and went into
restructuring.
P/E and company growth ..continued..
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