Understanding Price-Earnings Ratio (P/E)

Understanding Price-Earnings Ratio (P/E)

The Price-Earnings ratio (P/E) is among the first things encountered by a new investor looking to explore investment fundamentals. It is a mathematical calculation that relates share price to the earnings per share, both past and projected. P/E = Share Price ÷ Earnings per Share (EPS) The P/E is displayed as a number value and is a simple yet effective way of determining whether or not a stock is fairly priced, often referred to as valuation. The earnings per share (EPS) is the key factor in this equation as it can be represented by various different values. If you choose to use the sum of the past 4 quarters EPS than you are looking at the ‘trailing P/E’. This will show you how the current share price relates to the past performance. This is a fixed value. However, you may also choose to use projected future EPS values to calculate the potential ‘forward P/E.» Due to the fact many analysts differ in opinion on projected earnings, this value often has a range.

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