Choosing an Earnings Measure for Weekly P/E Ratios

# Calculation of weekly P/E ratio


# Calculation of weekly P/E ratio












The P/E-ratio is defined as $$ \frac{\text{Market value per share}}{\text{Earnings per share (EPS)}} $$ I have weekly observations of stock prices, but what measure should I use for EPS? Should it for example be the EPS of the previous 12 months? What is the typical approach?

References to journal papers computing weekly P/E-ratios are very welcome.

## Answer by ProbablePattern (score 1)

https://quant.stackexchange.com/a/14678

I strongly recommend reading an undergraduate finance textbook like Investments by Bodie, Kane, and Marcus. Your methodology may be limited by your data. For example, using forward P/E requires next fiscal year's EPS estimates. NTM (next twelve months) requires quarterly EPS estimates. If you do not have estimates, the best method is TTM (trailing twelve months). For longer time horizons, you may want to look at CAPE (cyclically adjusted P/E).

## Answer by pincopallino (score 1)

https://quant.stackexchange.com/a/14692

I think you are confusing the goal with the means. The calculation of the PE is not the goal, the true goal is assessing whether a particular stock is an interesting investment opportunity (cheap) under an investment thesis (set of hypotheses).

Therefore, there is an infinite number of ways to calculate PE ratios, as a results of a set of different assumptions as well as a result of an infinite adjustments deemed necessary by the analyst (removing the contribution of one-off items, for example). This also explains why the definition of PE ratio, as per textbooks, is not really "precise" as you may otherwise expect coming from a more technical background.

It is hard to recommend a PE calculation methodology without knowing your investment thesis.

EDIT

I believe that even under a panel data model framework the choice of PE should be motivate and interpreted through a fundamental approach. Let me make a couple of examples:

- Trailing 12M PE and Last FY: backward looking metrics tend to favor an "as-it-is" approach, ie assuming company bottom line might not change. Does the market "revalues" current bottom lines? What is the pattern there?

- Forward looking PE metrics: How far does the market look? 1-qr, 1-yr and 2-yr growth assumptions might offer different performances, although probably correlated as intuition suggests. @ProbablyPattern suggests the use of CAPE, it is a great hint.



Bottom Line:

- Different PEs might try to capture different market dynamics. You might even try to combine a few metrics - For example backward looking PEs and EPS growth expectations

- I guess it is important to understand what the choice of PE implies

## Answer by emcor (score 0)

https://quant.stackexchange.com/a/14700

As your model is to predict stock returns via P/E, I suggest you try out all possible P/E's in a backtest and select the one with best forecast ability(lowest forecast error).