Can Investors Trust the P/E Ratio?
Few stock market metrics have cycled in and out of favor as often as the price-to-earnings (P/E) ratio, which was popularized by the legendary value investor Benjamin Graham—one of Warren Buffett‘s mentors. Price-to-earnings ratios assess the relative attractiveness of a potential investment based on the price of a company’s shares relative to its earnings.
Trailing P/E takes the current share price divided by the total earnings per share (EPS) over the past 12 months. Forward P/E instead uses the current share price divided by the expected EPS forecast over some future period. The resultant figures can provide valuable insight into the quality of an investment, though just how clear a view is still up for debate.
