Digging deeper into the pe ratio shareinvestor educational series anoxic vs hypoxic brain injury

Let’s say the PE ratio for a company is 10. An intuitive way to understand the number is that it will take 10 years for the company to earn back money for investors equal to the price they are paying for it. We thus say this company is “trading at 10 times its earnings”, or “is trading at an earnings multiple of 10.”

Using earnings in the past 12 months will get you a historical PE ratio. Using an estimate of next year’s earnings will get you a projected PE ratio, or a PE ratio estimate. anoxic seizure Others tinker around with how earnings are calculated. They take out one-off earnings events, or average the last five to 10 years of earnings. You will get other ratios using these methods.

Switching earnings to the left hand side, you get a second formula of price = earnings * PE ratio.

This means the target price for the company can be thought of as its earnings, multiplied by the number of times it is thought to trade at. Historical PE

The convention is to use earnings going back one year. what is anoxic encephalopathy Note that we do not use last year’s earnings, but reported earnings for the past 12 months. In late August, where we are in now, companies would have reported earnings for the first half of 2013. Its reported earnings for the past 12 months thus includes earnings for the first six months of 2013, and for the last six months of 2012. You don’t want your data to be outdated, which would be the case if you just used 2012 earnings.

Thus, the historical PE ratio is not static. It can change dramatically depending on how its inputs change. hypoxic brain injury treatment Most notably, an earnings number drop will cause the denominator to shrink and the resulting ratio to soar. An earnings increase will cause the ratio to drop.

But you did not do your homework. The company’s last four quarters of earnings per share actually look like this: 8 + 3 + 4 + 5, adding to 20 cents. In other words, it earned 8 cents in the furthest-away quarter, followed by an earnings plunge to 3 cents, before slowly recovering to 4 cents and 5 cents in the last two quarters – adding up to 20 cents for the past year. Perhaps, it earned 8 cents in an extraordinarily good quarter, or there was a one-off property sale that distorted the number.

If investors believe this bad year to be a temporary phenomenon, they will not take flight. But if they think a permanent shift in a company’s business dynamics has occurred, a massive share price plunge will be on its way the moment the company reports its first fall in earnings to 2 cents a share.

But using estimated, or forward PE ratios to base one’s investment decisions is even more dangerous than using historical PE ratios. Projections are not necessarily accurate. hypoxic ischemic encephalopathy nursing diagnosis If enough investors believe in the wrong projection, a bubble will develop. Once again, an earnings disappointment will result in a steep price plunge.

At the height of the dotcom bubble, shares of technology companies were trading at PEs above 100 or 200, with Yahoo famously trading at well over 1,000 times its historical earnings. The bubble soon burst. Today, Yahoo trades at 27 times its core historical earnings.