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Determining share prices

Share prices in a publicly traded company are determined by marketsupply and demand, and thus

depend upon the expectations of buyers and sellers. Among these are:

The company's future and recent performance, including potential growth;

Perceived risk, including risk due to high leverage;

Prospects for companies of this type, the market sector .

By dividing the price of one share in a company by the profits earned by the company per share, you

arrive at the P/E ratio. If earnings per share move proportionally with share prices the ratio stays the

same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises.

The earnings figure used is the most recently available, although this figure may be out of date and may

not necessarily reflect the current position of the company. This is often referred to as a 'trailing P/E',because it involves taking earnings from the last four quarters.

Definition

There are various P/E ratios, all defined as:

The price per share in the numerator is the market price of a single share of the stock. The earnings

per share in the denominator depends on the type of P/E:

"Trailing P/E" or "P/E ttm": Earnings per share is the net income of the company for the most

recent 12 month period, divided by number of shares outstanding. This is the most common

meaning of "P/E" if no other qualifier is specified. Monthly earning data for individual companies

are not available, so the previous four quarterly earnings reports are used and earnings per 

share is updated quarterly. Note, companies individually choose their financial year so the

schedule of updates will vary.

"Trailing P/E from continued operations": Instead of net income, uses operating earnings which

exclude earnings from discontinued operations, extraordinary items (e.g. one-off windfalls andwritedowns), or accounting changes. Note, longer-term P/E data such as Shiller's uses net

earnings.

"Forward P/E", "P/Ef", or "estimated P/E": Instead of net income, uses estimated net earnings

over next 12 months. Estimates are typically derived as the mean of a select group of analysts

(note, selection criteria is rarely cited). In times of rapid economic dislocation, such estimates

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become less relevant as "the situation changes" (e.g. new economic data is published and/or 

the basis of their forecasts become obsolete) more quickly than analysts adjust their forecasts.

The P/E ratio can alternatively be calculated by dividing the company's market capitalization by its

total annual earnings.

For example, if stock A is trading at $24 and the earnings per share for the most recent 12 month

period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is

paying $8 for every dollar of earnings. Companies with losses (negative earnings) or no profit have

an undefined P/E ratio (usually shown as Not applicable or "N/A"); sometimes, however, a negative

P/E ratio may be shown.

By comparing price and earnings per share for a company, one can analyze the market's stock

valuation of a company and its shares relative to the income the company is actually generating.

Stocks with higher (and/or more certain) forecast earnings growth will usually have a higher P/E,

and those expected to have lower (and/or riskier) earnings growth will in most cases have a lower 

P/E. Investors can use the P/E ratio to compare the value of stocks: if one stock has a P/E twice that

of another stock, all things being equal (especially the earnings growthrate), it is a less attractive

investment. Companies are rarely equal, however, and comparisons between industries,

companies, and time periods may be misleading.

Since 1900, the average P/E ratio for the S&P 500 index has ranged from 4.78 in Dec 1920 to 44.20

in Dec 1999,[4]

with an average around 15.</ref>[citation needed ][5]

The average P/E of the market varies

in relation with, among other factors, expected growth of earnings, expected stability of earnings,

expected inflation, and yields of competing investments. For example, when US treasuries yield high

returns, investors pay less for a given earnings per share and P/E's fall.