How to read PE ratio?

1) Price-Earning ratio = share price / earnings per share (EPS)

2) Simple Definition: For one year of earnings, how many times is the market valuing it?

3) Generally higher ratio means investors are confident about the future prospects of the company and vice versa. 

4) Another way to look at it is higher ratio means likely to be overvalued and lower value signals undervaluation.

5) Be wary of just using one year of earnings for cyclical company eg. Company who earns $1 every year for 9 years but at the end of the cycle earns $5.  PE ratio for a $10 company is 10 for every year and for the final year it is just 2.  SOLUTION: Take average EPS over the cycle period.

6) Historical PE = market price/trailing 12 months EPS (Good for gauging industry PE ratio)

7) Forward PE = market price/estimated future EPS (Good for forward estimation provided you can estimate the forward EPS reasonably well)

8) Be extremely wary about EPS because this is subjected to accounting treatment i.e. clever accountants can play with the numbers legally (creative accounting within the rules of accounting standards)

9) If you have only 10s to decide on a stock just take most recent market price / most recent EPS, if the ratio is high, ask yourself it is justified to be trading at such a high valuation? (Depends on your valuation of course)

10) Lastly, PE ratio is just ONE measure of value and should be used in conjunction with other ratios and valuation methods for investment decision making.

# Fundamental Analysis

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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  • FSW
    ·2022-03-25
    $Vanguard Index(VGT)$[财迷][财迷]
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  • SnailWalker
    ·2022-03-25
    [Happy] [Happy]
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  • Barbarazhao
    ·2022-03-25
    Thanks for sharing
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  • thanks for sheing
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  • dinger
    ·2022-07-10
    Thanks. Good info, let me apply on the upcoming days and see. [Strong]
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  • Domiqta
    ·2022-06-05

    Nice infd there!!!

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  • jojoang
    ·2022-04-30
    这篇文章不错,转发给大家看
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  • jiunmingteo
    ·2022-04-17
    Good info
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  • unitlancer
    ·2022-03-25
    thanks for sharing on this!
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  • Bulltrader
    ·2022-03-25
    good explain. forward PE u may use qtq qtr earning or estimate earning
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  • osjusti
    ·2022-03-25
    thanks for sharing
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  • Goldenfleece
    ·2022-03-25
    Good info on PE ratio.
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  • Elsielamwk
    ·2022-03-25
    Thanks for info
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  • cykhor
    ·2022-03-25
    好文。。。谢谢
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  • chrng
    ·2022-03-25
    [What] [What] [What]
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  • Kin23
    ·2022-03-25
    Thanks for sharing
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  • Khikho
    ·2022-03-25
    较高的PE比率意味着可能被高估,较低的价值意味着被低估。
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  • 伙计办大事
    ·2022-03-25
    [微笑] [微笑] [微笑]
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  • Michelle Ong
    ·2022-03-25
    Like back thanks
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  • mei leng
    ·2022-08-19
    这篇文章不错,转发给大家看
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