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Showing posts from February, 2018

Fundamental Analysis: Price-earning ratio and its variants

Price-Earning (PE) ratio is the ratio of market price of the stock compared to the earnings per share. It shows the sum of money you are ready to pay for each dollar worth of earnings of the company. Its formula is PE = Market Value per Share / Earning per Share (EPS) DIFFERENT VERSIONS OF PE RATIOS Trailing PE When Earnings per share is taken from the last 12 months results , the resulting PE is called trailing PE. Trailing PE captures what is already done and happened. Its most popular because of its objectivity. Forward PE Forward PE uses the estimated future earnings of the company instead of the trailing figures. It is handful in comparing present earnings and future earnings .It is helpful in predicting what earnings look like in absence of one off charges and accounting adjustments. Personally I am not a great fan of Forward PE because it can be fraught with folly. The earnings estimate can go wrong for so many reasons and the whole analysis can get wrong. Moreover wi