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  • Issue 6 Appendix

Appendix on P/E Ratios

A P/E ratio is a Price-to-Earnings ratio (a stock’s current share price divided by the stock’s EPS, earnings-per-share, for the last year). The P/E ratio for a stock can be expressed in two other ways to give investors extra information; Forward P/E means the current share price divided by the average analyst expectation for the stock’s EPS for next year, and P/E (ttm) means Price-to-Earnings ratio (trailing twelve month) and this is just calculated by taking the current share price and dividing it by the stock’s EPS for the past twelve months (past 4 quarters). Investors want to see a stock’s Forward P/E ratio be lower than the stock’s current P/E ratio, which would show that analysts expect the stock’s EPS to grow in the next year, and obviously how much lower it is also plays a big part. Investors look at P/E (ttm) because it can give them a more up-to-date view of whether or not the stock is overvalued. When looking at a stock’s P/E ratio, investors will look to see how the stock’s current P/E ratio compares to the P/E ratio of its competitors, the stock’s historical P/E range, the stock’s Forward P/E ratio, the P/E ratio of the industry as a whole, and the P/E ratio of the market (the S&P 500 for example). If a stock’s P/E ratio is higher than one of the things I mentioned above (with the exception of Forward P/E) then the stock might be overvalued. A P/E ratios can be calculated for a specific stock, a group of stocks, or an index (as I described above using the S&P 500). Ultimately, looking at P/E ratios is only useful if you put a company’s P/E ratio in perspective… I can go into more detail about what I mean by that if anyone is interested.

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