Price / Earnings Ratio
Q1: (Introductory) What three alternative measures of the price-earnings ratio (P/E ratio) are described in this article? Answer:
Following are three price-earnings ratio described in the article: 1.
“Forward” P/E ratio
“Trailing” P/E ration
Q2: (Advanced) Which of the three measures matches the definition of the P/E ratio given in your textbook? Explain your answer. Answer:
Books has only discuss the simple P/E ratio, PE ratio measures how much investor willing to pay per dollar of current earnings, higher PEs are often taken to mean that firm has significant prospects for future growth.
Price per Share
PE Ratio = _____________________
Earnings per Share
Generally similar firms have similar PE ratios, like technology companies may have similar PE ratio compare to utility, because technology more opportunity to fast growth with some risk where utility companies may be slow growth with very low risk.
Q3: (Introductory) What weakness in the simple P/E ratio is overcome by using the “forward” P/E ratio? What problems arise with the forward measurement?
“Forward” P/E measure is the price-to-earnings ratio (P/E) using forecasted earnings for next 12 month or giving period of time. Simple P/E give only current ratio for current earning where forward P/E give near future earnings. Where high forward P/E mean that company investors are willing to more because they expect earnings to grow. The problem with “forward” P/E is it is based on analysis earning forecast, as Mr. Mortimer said "You can make the forward P/E anything you want [by boosting the forecast],".
Q4: (Advanced) What weakness in the simple P/E ratio is overcome by using the trailing four quarters in the measurement? Specifically identify how this measure differs from the simple P/E ratio first described in the article.
“Trailing” P/E is calculated based on last four quarter actual earnings (after...
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