Choosing the Price Date for Historical P/E Ratios

Summary

The document considers which share price to pair with reported earnings when calculating a historical price-to-earnings ratio. The questioner uses the price from the day after an earnings announcement, reasoning that the market may need a day to react. The reply distinguishes trailing P/E, based on past earnings, from forward P/E, based on projected earnings, and notes that some references express P/E using an average common stock price divided by net income per share.

The discussion does not settle on a standard averaging window or establish that the next-day price is the right choice. It also cautions that accounting inputs and assumptions affect the metric, and that using a recent price may be more meaningful for a highly volatile stock. The brief exchange offers considerations rather than a tested calculation method; it does not compare alternative price dates or provide evidence that a one-day reaction lag is generally appropriate.

Key ideas

• Trailing and forward P/E ratios use different earnings bases.
• Some references define P/E using an average share price and net income per share.
• The discussion does not specify how to calculate the average price or choose its time window.
• A volatile stock may call for a more recent price, but the exchange does not test this approach.
• Using the day after an earnings release is presented as a question, not a validated convention.

Tags

# Best practice approach for calculating the PE-ratio


# Best practice approach for calculating the PE-ratio












I am trying to calculate the historical PE ratios of a stock, but which date should I use to get the stock price in calculating the PE ratio?

My current approach is to use the stock price of a day after the stock's financial results are released. My rationale is the market will take a day to react to the stock's financial results, and the stock price will adjust accordingly, assuming that the market is efficient.

For example, if the stock's financial earning is annouced on 1 Feb 2010, I will take the stock price on 2 Feb 2010 to calculate the PE ratio.

Does this make sense?

## Answer by Probilitator (score 1)

https://quant.stackexchange.com/a/10423

According to this reference there are indeed several types of P/E-Ratios (trailing P/E that is based on previous earnings and forward P/E which is based on projected earnings)

Also several books calculate the P/E according to the following formula

$P/E-Ratio = \frac{Average Common Stock Price}{Net Income Per Share}$

(Confer source1, source2 and source3)

Unfortunately I couldn't find how the average-stock-price ist supposed to be calculated. (Does one use a rolling average and if that is the case with which time-window ) Some accounting figures and assumptions also seem to be involved into calculating this performance indicator.

Here I also found an interesting comment cautioning that in case of a very volatile stock one should use the latest stock price to get a meaningful P/E-Ratio

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.