5 – The P/E Ratio Demystified

2020-11-18

Introduction

P/E Ratio

The most utilized metric to value a stock is the P/E ratio. In its simplest form, that is simply the price of the stock divided by the earnings-per-share. It is a valuable valuation metric, because in the long run a company’s stock price will correlate with its earnings. But the real question is what earnings metric is it based on? Moreover, the P/E ratio can be confusing because it will often be reported differently on different financial websites. The primary reason is because different websites produce P/E ratios utilizing different iterations of earnings. FAST Graphs provides subscribers all four of the primary earnings metrics that are utilized or reported. With this FAST Graphs Value-You Academy installment, Bill Kay will break down and illustrate the differences and how they are generated on the 4 primary earnings metrics. Publicly traded companies report their financial results in different ways for various reasons. Bill will illustrate the difference between the key reported earnings metrics:

1.Adjusted (Operating) Earnings also known as reported earnings, Warren Buffett’s favorite

2.Owners Earnings a close cousin to free cash flow

3. Basic Earnings and finally

4. Diluted Earnings (GAAP).

Additionally, Bill will explain why companies report these different earnings metrics and explain the adjustments found in the financial statements that are used to calculate them.