# price-earnings ratio

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## Price-earnings ratio

Shows the multiple of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio are determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher multiple means investors have higher expectations for future growth, and have bid up the stock's price.

## Price-Earnings Ratio

The price of a security per share at a given time divided by its annual earnings per share. Often, the earnings used are trailing 12 month earnings, but some analysts use other forms. The P/E ratio is a way to help determine a security's stock valuation, that is, the fair value of a stock in a perfect market. It is also a measure of expected, but not realized, growth. Companies expected to announce higher earnings usually have a higher P/E ratio, while companies expected to announce lower earnings usually have a lower P/E ratio. See also: PEG

## price-earnings ratio (P/E ratio)

A common stock analysis statistic in which the current price of a stock is divided by the current (or sometimes the projected) earnings per share of the issuing firm. As a rule, a relatively high price-earnings ratio is an indication that investors believe the firm's earnings are likely to grow. Price-earnings ratios vary significantly among companies, among industries, and over time. One of the important influences on this ratio is long-term interest rates. In general, relatively high rates result in low price-earnings ratios; low interest rates result in high price-earnings ratios. Also called earnings multiple, market multiple, multiple, P/E ratio. See also forward P/E, trailing P/E.

## price-earnings ratio

a ratio used to appraise a quoted public company's profit performance, which expresses the market PRICE of the company's SHARES as a multiple of its PROFIT. For example, if a company's profit amounted to £1 per share and the price of its shares was £10 each on the STOCK MARKET; then its price-earnings ratio would be 10:1. Where a company's prospects are considered by the stock market to be good, then it is likely that the company's share price will rise, producing a higher price-earnings ratio. Price-earnings ratio is the mirror image of EARNINGS YIELD. See EARNINGS PER SHARE.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

## price-earnings ratio

a ratio used to appraise a quoted public company's profit performance that expresses the market PRICE of the company's SHARES as a multiple of its PROFIT. For example, if a company's profit amounted to £1 per share and the price of its shares was £10 each on the STOCK EXCHANGE, then its price-earnings ratio would be 10:1. Where a company's prospects are considered by the stock exchange to be good, then it is likely that the company's share price will rise, producing a higher price-earnings ratio. The price-earnings ratio is the mirror image of EARNINGS YIELD. See EARNINGS PER SHARE.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Ang and Bekaert (2007) talked about the reliability of using price-earnings ratio to predict future dividend growth.
With an average price-earnings ratio of six, Ghalibaf Asl said Iranian stocks are attractive to investors inside and outside the country -- even if Iran faces major geopolitical uncertainties and the constant risk of more sanctions.
This suggests the existence of a mode of capitalization of current earnings, governing the changes of price-earnings ratios. It is called the "principle of compensation or discount" (Molodovsky, 1953).
While one could simply dismiss this observation as irrelevant to outside investors, the historical record suggests that top executives may be on to something: over longer time periods, stocks with low price-earnings ratios and low market-to-book ratios have outperformed the more glamorous issues characterized by high valuation ratios.
This article examines the historical relationship between price-earnings ratios and subsequent stock market performance and discusses why history might not repeat itself this time.
By themselves, price-earnings ratios are not only meaningless as predictors of market value or the fairness of market prices, they can lead investors into misperceptions of which alternatives provide the most attractive returns for their available funds.
Based on some preliminary findings, such firms have lower price-earnings ratios and smaller appreciations in market value over time than profit-oriented firms.
The multiple of earnings formula: Another popular valuation method is to rely on Wall Street-style price-earnings ratios. Typically, says Milne, a privately held software company will sell for around ten times its average annual profits--though "many companies don't have enough profitable operating history to provide a legitimate ratio, or the earnings are overstated because the owners aren't taking competitive salaries." Milne also warns that it's unrealistic to value a private company by relying on the price-earnings ratios that prevail among public companies.
Stock prices became unhinged from reality; average price-earnings ratios exceeded 60 (in the United States P:E ratios of 20 are considered high).
As a result, conventional price-earnings ratios hit a peak of more than 70 in August 1987, which was about three to five times the PE ratios in other major markets.
The expected market return is that amount plus or minus expected changes in valuation ratios: will stocks return more as price-earnings ratios rise, or return less as price-earnings ratios fall?

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