![]() ![]() The price-to-earnings ratio can be rather meaningless for early-stage companies that are barely profitable or yet profitable. Using a P/E ratio is most appropriate for mature, low-growth companies with positive net earnings. What are the Pros and Cons of the P/E Ratio? Forward P/E Ratio: The price-to-earnings ratio is calculated using the upcoming, forecasted net earnings of a company.Trailing P/E Ratio: The price-to-earnings ratio is calculated using the earnings from the actual performance in the last twelve months (LTM).There are two common variations of the P/E ratio: Forward Price-Earnings Ratio: What is the Difference? Said differently, it would take approximately 10 years of accumulated net earnings to recoup the initial investment. Therefore, the market is currently willing to pay $10 for each dollar of earnings generated by the company. The company’s price-to-earnings ratio is 10x, which we determined by dividing its current stock price by its diluted earnings per share (EPS). Suppose a publicly-traded company’s latest closing share price is $20.00, and its diluted EPS in the last twelve months ( LTM) is $2.00. Price Earnings Ratio Definition, Description, and Issues (Source: WSP Trading Comps Course) Price-to-Earnings Ratio Calculation Example Net Income: In contrast, net income is the accounting profitability of a company that measures operating performance across a period of time.Earnings Per Share (EPS): The earnings per share (EPS) metric is calculated by using the weighted average number of shares (i.e.While the two formulas we’ve discussed thus far are conceptually the same, the answers usually vary marginally from one another due to a minor discrepancy: Price-to-Earnings Ratio (P/E) = Equity Value ÷ Net Income
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