P/E

The Price/Earnings Ratio (P/E) is a valuation ratio where a company's current share price is divided by its per-share earnings.

P/E Ratio is one of the most widely watched measures of valuation for both the stock market as a whole and for individual stocks. It is sometimes referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. If a company is trading at a P/E of 15, an investor would be paying $15 for $1 of earnings.

P/E for a public company
 is a valuation ratio of a company's current share price compared to its per-share earnings. The ratio is calculated as:


 * Market Value Per Share / Earnings Per Share (EPS)

Investopedia explains:

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number. The use of (GAAP) reported earnings vs the use of (non-GAAP) operating earnings is also a common source of confusion.

P/E for a fund or an index
There are multiple ways to compute the P/E of a fund (or an index) as a composite of individual companies' earnings and market values. The following describes distinct methodologies for TTM (Trailing Twelve Months) P/Es. It is important to only compare P/E values computed with the same methodology. There is no consensus on which approach is better.

Standard & Poor's (S&P) computes the S&P 500 TTM P/E by dividing the current index price by the sum of the TTM earnings (positive or negative) of all constituents. To have a more manageable number for the index level, the sum of the earnings is divided by a fixed scale factor called the divisor. In other words, the P/E of the index is directly proportional to the aggregate market capitalization divided by the aggregate earnings. The State Street SPDR funds display TTM P/E for the indices they track (e.g. S&P), based on a weighted harmonic average computation, which is mathematically equivalent to the S&P methodology.

ETF.com follows the same methodology as Standard & Poor's for all ETFs it tracks.

MSCI follows the same methodology as Standard & Poor's for all indices it publishes. PE information from MSCI is only available to subscribers though.

Vanguard provides a TTM P/E metric on the Web pages describing its funds, using the following methodology. First, the P/E of each constituent is determined, based on price and TTM earnings. Then a weighted harmonic average of such individual P/Es is computed, associating a weight to each constituent proportional to its market value relative to the aggregate market value of the fund. Using a harmonic average presents the advantage of reducing the effect of outliers (e.g. companies with very small earnings, hence a high P/E). Companies with negative earnings were included in the computation until May 2017 (like S&P does). Starting from June 2017, Vanguard aligned its methodology with Morningstar and now excludes companies with negative earnings from the computation.

Morningstar performs a computation similar to Vanguard, while applying a filter to individual P/Es. Negative values are eliminated (and corresponding companies not included in the aggregate market value). Then the weighted harmonic average is computed. Note that this TTM P/E metric isn't directly accessible via the Morningstar Web pages, which display a Forward P/E (based on analysts estimates) instead of a Trailing (TTM) P/E. Ycharts.com does provide the Morningstar TTM P/E metric for funds, referring to it as "Weighted Average PE Ratio".

Shiller PE10
Robert Shiller has developed a stock valuation metric known as "PE10"; alternatively called CAPE (Cyclically Adjusted Price Earnings) ratio, or Shiller PE ratio. It is a variation of P/E, but with EPS (Earnings Per Share) averaged over the prior 10 years. Both terms (Price and Earnings) have to be expressed in real terms, i.e. adjusted for inflation.



\text{PE10} = \frac{\text{Stock Price}}{\text{average EPS over prior 10 years}} $$

Note that Prof. Shiller uses the same methodology as Standard & Poor's (S&P) to compute the 'Price' and 'Earnings' components of the equation (i.e. simple aggregate).