The price to earnings ratio (PE) is a tricky investing metric. Sometimes a low PE ratio is good, sometimes bad. What is also extremely important to understand is the difference between real earnings and adjusted reported earnings. Management will always try to paint a picture that is as rosy as possible so we have to be aware of those little legal tricks they are using.
In order to explain what a PE ratio is, what to watch for when calculating one, I have summarized Chapter 12 of Benjamin Graham’s book The Intelligent Investor where he discusses the metric. The video covers his examples but also modern examples as the methodology of adjusting earnings has changed but what Wall Street does hasn’t.
The things to watch are:
– Real and adjusted earnings
– Dilution
– How to use average long-term earnings
Enjoy the video, I am sure you will learn something new about the commonly used PE ratio.
Sven Carlin is an independent stock market researcher looking for value around the globe. His services are offered on the Sven Carlin Research Platform.
