When you hear people talk about stocks or the stock market, you often hear the phrase, “PE Ratio”.
A. The PE Ratio is the “Price to Earnings Ratio.”
To calculate the PE Ratio, you divide the price of one stock share by the the Earnings Per Share (EPS) for a year.
For example, as of September 15, 2015, Apple (AAPL) is trading at $116.28. The Earnings Per Share during the trailing twelve months (ttm) is $9.12.
So the PE Ratio for AAPL is:
PE Ratio = $116.28 / $9.12 = 12.75
B. How to interpret the PE Ratio:
If you average the PE Ratio of the 500 companies in the S&P 500 Index (Large Capitalization stocks in the U.S.A.), the average at any time over the last 60 years ranges from around a PE of 8 to around 65, though most of the time, the PE Median is around 14.60. Currently, the S&P 500 PE Ratio is around 19.93.
C. Is a low PE cheap? Is a high PE expensive? What is Trailing PE and Forward PE?
The lower the PE Ratio, the cheaper the stock valuation. The higher the PE Ratio, the more expensive the stock is priced.
Is it good for a PE Ratio of a particular stock to be very low? Or is it bad for a PE Ratio of a particular stock to be very high?
And what is the difference between a Trailing PE and a Forward PE?
These will be discussed in a future article.