How is price to earnings calculated

A trailing PE ratio occurs when the earnings per share is based on previous period. A justified PE ratio is calculated by using the dividend discount analysis. The price to earnings ratio indicates the expected price of a share based on its earnings.

A company with a lower ratio, on the other hand, is usually an indication of poor current and future performance. This could prove to be a poor investment. In general a higher ratio means that investors anticipate higher performance and growth in the future.

It also means that companies with losses have poor PE ratios. An important thing to remember is that this ratio is only useful in comparing like companies in the same industry. Since this ratio is based on the earnings per share calculation, management can easily manipulate it with specific accounting techniques.

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