Conscious Investor Knowledge Base

The PE ratio is also referred to as the Price-Earnings ratio or the Price-to-earnings ratio. In simple terms, it is the price of a stock divided by its earnings per share EPS. The differences occur because of the way that EPS is calculated. There are three main methods leading to three different PE Ratios as displayed in the following table. The second column in the table refers to the EPS that is used.

But beware—these names are not standard. For example, the central PE ratio is sometimes referred to as the current PE ratio or simply the PE ratio, which shows how much we have become dependent on analysts’ forecasts.

In Conscious Investor we want to be independent of the earnings forecasts of others. For this reason we use the trailing PE ratio. This ratio only relies on the current price and earnings information published by the company.

In the US and Canada, public companies report their earnings every 3 months and so EPSttm (earnings per share over the trailing 12 months) consists of the sum of the quarterly EPS over the 4 most recent quarters. Hence the EPSttm will be updated every 3 months.

In Australia, public companies report their earnings every 6 months and so EPSttm consists of the sum of the 6-monthly EPS over the 2 most recent 6-monthly periods. Hence the EPSttm will be updated every 6 months.

Another variation in PE ratios arises because of differences between the protocols used by different data suppliers as to what should be included in earnings and what should be excluded. No matter what the actual method, there is the issue of the quality of earnings in terms of the accounting standards of the reporting company. This is why it is vitally important to always have a “margin of safety.”