Casa Blanca

Topics: P/E ratio, Financial ratio, Fundamental analysis Pages: 2 (420 words) Published: May 20, 2013
Centenary College

Course ID: GFN 610

Course Name: Financial Management

Instructor: Frank M.Longo MBA, CPA
Student: Tomas Silverio
Subject: Price/Earnings Ratio
Please read the article submitted in class this past week. Write a paper explaining what the P/E Ratio is, what does it tell you, how much should investors rely on it in making decisions, what happens when a company is not profitable, what is a trailing and forward P/E Ratio, what are the advantages and disadvantages of using historical data? A- Explain what the P/E Ratio is:

P/E Ratio is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS): P/E Ratio = Market Value per Share

Earnings per Share (EPS)

B- What does the P/E Ratio tell you?
Theoretically, P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay \$20 for every \$1 of earnings that the company generates.

C- What is a trailing and forward P/E Ratio?
Trailing P/E Ratio is the sum of a company's price-to-earnings, calculated by taking the current stock price and dividing it by the trailing earnings per share for the past 12 months. Forward P/E Ratio is the price of a security per share at a given time divided by its projected earnings per share over the coming year. A forward 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.

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