Wednesday, 22 May 2013

Of Interest

Price to Earnings (ttm)

The P/E ratio is arguably the most common method for determining valuations of both individual stocks and the market as a whole. The P/E ratio divides the price by the earnings of the trailing twelve months. This can be problematic when earnings are temporarily depressed during a recession and the ratio becomes useless. This can be largely avoided by using other forms of the P/E such as the cyclically adjusted P/E, or by using other metrics altogether such as the price to sales ratio or Tobin's q. This ratio is often modified by using forward earnings instead of trailing earnings, but should not be confused as they are quite different. Forward earnings estimates are usually higher than trailing earnings so the ratio is probably on average lower.
P/E - Historical Chart of the S&P 500 Price to Earnings RatioIndex Log Chart

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