Which set of earnings is used to work out the P/E of a stock
This is a note from my broker, CMC Markets, who use Morningstar: Morningstar calculate the P/E Ratio using a weighted average of the most recent earnings and the projected earnings for the next year. This may result in a different P/E Ratio to those based solely on past earnings as reported on some sites and other publications. They show the P/E as being 9.93. So obviously past earnings would usually be used but you would need to check with your source which numbers they are using. Also, as BHP's results just came out yesterday it may take a while for the most recent financial details to be updated. "There are two common types of P/E ratio calculations: ""trailing"" and ""forward"" (and then there are various mixes of the two). Trailing P/E ratios are calculated as [current price] / [trailing 12-month EPS]. An alternative is the Forward P/E ratio, which is based on an estimate of earnings in the coming 12 months. The estimate used is usually called ""consensus"" and, to answer your question, is the average estimate of analysts who cover the stock. Any reputable organization will disclose how they calculate their financials. For example, Reuters uses a trailing ratio (indicated by ""TTM"") on their page for BHP. So, the first reason a PE ratio might not jump on an announcement is it might be forward looking and therefore not very sensitive to the realized earnings. The second reason is that if it is a trailing ratio, some of the annual EPS change is known prior to the annual announcement. For example, on 12/31 a company might report a large drop in annual earnings, but if the bulk of that loss was reported in a previous quarterly report, then the trailing EPS would account partially for it prior to the annual announcement.  In this case, I think the first reason is the culprit. The Reuters P/E of nearly 12 is a trailing ratio, so if you see 8 I'd think it must be based on a forward-looking estimate." "@jlowin's answer has a very good discussion of the types of PE ratio so I will just answer a very specific question from within your question: And who makes these estimates? Is it the market commentators or the company saying ""we'd expected to make this much""? Future earnings estimates are made by professional analysts and analytical teams in the market based on a number of factors. If these analysts are within an investment company the investment company will use a frequently updated value of this estimate as the basis for their PE ratio. Some of these numbers for large or liquid firms may essentially be generated every time they want to look at the PE ratio, possibly many times a day. In my experience they take little notice of what the company says they expect to make as those are numbers that the board wants the market to see. Instead analysts use a mixture of economic data and forecasting, surveys of sentiment towards the company and its industry, and various related current events to build up an ongoing model of the company's finances. How sophisticated the model is is dependent upon how big the analytics team is and how much time resource they can devote to the company. For bigger firms with good investor relations teams and high liquidity or small, fast growing firms this can be a huge undertaking as they can see large rewards in putting the extra work in. The  At least one analytics team at a large investment bank that I worked closely with even went as far as sending analysts out onto the streets some days to ""get a feeling for"" some companies' and industries' growth potential. Each analytics team or analyst only seems to make public its estimates a few times a year in spite of their being calculated internally as an ongoing process. The reason why they do this is simple; this analysis is worth a lot to their trading teams, asset managers and paying clients than the PR of releasing the data. Although these projections are ""good at time of release""  their value diminishes as time goes on, particularly if the firm launches new initiatives etc.. This is why weighting analyst forecasts based on this time variable makes for a better average. Most private individual investors use an average or time weighted average (on time since release) of these analyst estimates as the basis for their forward PE."
Not quite. The EPS is noted as ttm, which means trailing twelve months  --- so the earnings are taken from known values over the previous year. The number you quote as the dividend is actually the Forward Annual Dividend Rate, which is an estimate of the future year's dividends. This means that PFE is paying out more in the coming year (per share) than it made in the previous year (per share). Usually their PE ratio will just be listed as 0 or blank.  Though I've always wondered why they don't just list the negative PE as from a straight math standpoint it makes sense. PE while it can be a useful barometer for a company, but certainly does not tell you everything.  A company could have negative earnings for a lot of reasons, some good and some bad.  The company could just be a bad company and could be losing money hand over fist, or the company could have had a one time occurrence such as a big acquisition or some other event that just affected this years earnings, or they could be an awesome high growth company that is heavily investing for their future and forgoing locking in profits now for much bigger profits in the future. Generally IPO company's fall into that last category as they are going public usually because they want an influx of cash that they are going to use to grow the company much more rapidly.  So they are likely already taking all incoming $$ and taking on debt to grow the company and have exceeded all of those options and that's when they turn to the stock market for the additional influx of cash, so it is very common for these companies not to have earnings.   Now you just have to decide if that company is investing that money wisely and will in the future translate to actual earnings. "This formula is not calculating ""Earnings"".  Instead, it is calculating ""Free Cash Flow from Operations"". As the original poster notes, the ""Earnings"" calculation subtracted out depreciation and amortization.  The ""Free Cash Flow from Operations"" adds these values back, but for two different reasons:" Imagine you have a bank account with $100 in it. You are thinking about selling this bank account, so ask for some bids on what it's worth. You get quotes of around $100. You decide to sell it, but before you do, you take $50 out of it to have in cash. Would you expect the market to still pay $100 for the account? The dividend is effectively the cash being withdrawn. The stock had on account a large amount of cash (which was factored into it's share price), it moved that cash out of it's account (to its shareholders), and as a result the stock instantly becomes priced lower as this cash is no longer part of it, just as it is in the bank account example. "Everything you are doing is fine. Here are a few practical notes in performing this analysis: Find all the primary filing information on EDGAR. For NYSE:MEI, you can use https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000065270&type=10-K&dateb=&owner=exclude&count=40 This is the original 10-K. To evaluate earnings growth you need per share earnings for the past three years and 10,11,12 years ago. You do NOT need diluted earnings (because in the long term share dilution comes out anyway, just like ""normalized"" earnings). The formula is avg(Y_-1+Y_-2+Y_-3) / is avg(Y_-10+Y_-11+Y_-12) Be careful with the pricing rules you are using, the asset one gets complicated. I recommend NOT using the pricing rules #6 and #7 to select the stock. Instead you can use them to set a maximum price for the stock and then you can compare the current price to your maximum price. I am also working to understand these rules and have cited Graham's rules into a checklist and worksheet to find all companies that meet his criteria. Basically my goal is to bottom feed the deals that Warren Buffett is not interested in. If you are interested to invest time into this project, please see https://docs.google.com/document/d/1vuFmoJDktMYtS64od2HUTV9I351AxvhyjAaC0N3TXrA" "Your company actually will most likely use some sort of options pricing model, either a binomial tree or black-scholes to determine the value for their accounting and, subsequently, for their issuance and realization.  First, market value of equity will be determined. Given you're private (although ""pre-IPO could mean public tomorrow,""), this will likely revolve around a DCF and/or market approaches.  Equity value will then be compared to a cap table to create an equity waterfall, where the different classes of stock and the different options will be valued along tranches. Keep in mind there might be liquidation preferences that would make options essentially further out of the money.  As such, your formulae above do not quite work. However, as an employee, it might be difficult to determine the necessary inputs to determine value.  To estimate it, however, look for three key pieces of information:  1. Current equity value  2. Option strike price  3. Maturity for Options  If the strike is close to the current equity value, and the maturity is long enough, and you expect the company to grow, then it would look like the options have more value than not.   Equity value can be derived from enterprise value, or by directly determining it via a DCF or guideline multiples.   Reliable forecasts should come from looking at the industry, listening to what management is saying, and then your own information as an insider." Are you implying that Amazon is a better investment than GE because Amazon's P/E is 175 while GE's is only 27?  Or that GE is a better investment than Apple because Apple's P/E is just 13.  There are a lot of other ratios to consider than P/E.  I personally view high P/E numbers as a red flag.  One way to think of a P/E ratio is the number of years it's expected for the company to earn its market cap.  (Share price divided by annual earnings per share)  It will take Amazon 175 years to earn $353 billion. If I was going to buy a dry cleaners, I would not pay the owner 175 years of earnings to take control of it, I'd never see my investment back. To your point.  There is so much future growth seemingly built in to today's stock market that even when a company posts higher than expected earnings, the company's stock may take a hit because maybe future prospects are a little less bright than everyone thought yesterday. The point of fundamental analysis is that you want to look at a company's management style and financial strategies.  How is it paying its debt?  How is it accumulating the debt?  How is it's return on assets?  How is the return on assets trending?  This way when you look at a few companies in the same market segment you may have a better shot at picking the winner over time.  The company that piles on new debt for every new project is likely to continue that path in to oblivion, regardless of the P/E ratio. (or some other equally less forward thinking management practice that you uncover in your fundamental analysis efforts). And I'll add... No amount of historical good decision making from a company's management can prepare for a total market downturn, or lack of investor confidence in general.  The market is the market; sometimes it's up irrationally, sometimes it's down irrationally. You don't. When you sell them - your cost basis would be the price of the stock at which you sold the stocks to cover the taxes, and the difference is your regular capital gain. The three places you want to focus on are the income statement, the balance sheet, and cash flow statement. The standard measure for multiple of income is the P/E or price earnings ratio  For the balance sheet, the debt to equity or debt to capital (debt+equity) ratio. For cash generation, price to cash flow, or price to free cash flow. (The lower the better, all other things being equal, for all three ratios.) Your observation is mostly right, that 1 is a the number around which this varies.  You are actually referencing PEG, P/E to Growth ratio, which is a common benchmark to use to evaluate a stock. The article I link to provides more discussion. Profit after tax can have multiple interpretations, but a common one is the EPS (Earnings Per Share).  This is frequently reported as a TTM number (Trailing Twelve Months), or in the UK as a fiscal year number.  Coincidentally, it is relatively easy to find the total amount of dividends paid out in that same time frame. That means calculating div cover is as simple as:  EPS divided by total dividend.  (EPS / Div). It's relatively easy to build a Google Docs spreadsheet that pulls both values from the cloud using the GOOGLEFINANCE() function.  I suspect the same is true of most spreadsheet apps.  With a proper setup, you can just fill down along a column of tickers to get the div cover for a number of companies at once. P/E can use various estimates in its calculation as one could speculate about future P/E rations and thus could determine a future valuation if one is prepared to say that the P/E should be X for a company. Course it is worth noting that if a company isn't generating positive earnings this can be a less than useful tool, e.g. Amazon in the 1990s lost money every quarter and thus would have had a N/A for a P/E. PEG would use P/E and earnings growth as a way to see if a stock is overvalued based on projected growth. If a company has a high P/E but has a high earnings growth rate then that may prove to be worth it. By using the growth rate, one can get a better idea of the context to that figure. Another way to gain context on P/E would be to look at industry averages that would often be found on Yahoo! Finance and other sites. Thanks to this youtube video I think I understood the required calculation. Based on following notation: then the formula to find x is: I found afterwards an example on IB site (click on the link 'How to Determine the Last Stock Price Before We Begin to Liquidate the Position') that corroborate the formula above. Some personal finance packages can track basis cost of individual purchase lots or fractions thereof. I believe Quicken does, for example. And the mutual funds I'm invested in tell me this when I redeem shares. I can't vouch for who/what would make this visible at times other than sale; I've never had that need. For that matter I'm not sure what value the info would have unless you're going to try to explicitly sell specific lots rather than doing FIFO or Average accounting. "For the S&P and many other indices (but not the DJIA) the index ""price"" is just a unitless number that is the result of a complicated formula.  It's not a dollar value.  So when you divide said number by the earnings/share of the sector, you're again getting just a unitless number that is incomparable to standard P-E ratios. In fact, now that I think about, it kinda makes sense that each sector would have a similar value for the number that you're computing, since each sector's index formula is presumably written to make all the index ""price""s look similar to consumers."