rationale: key to investment value, most widely used by Wall Street, proxy for risk and growth
drawbacks: negative or very low earnings make P/E useless, volatile, easily distorted
- calculation of actual ratio: trailing = Po/Eo
- leading = Po/E1
- Back out non-recurring items (gain/loss sale, impairments, accounting estimates)
- must normalize earnings for business cycle - either average recent EPS or **average recent ROE and multiply by most recent BVPS**
- calculation of justified ratio:
- trailing = (1-b)*(1+g)/(r-g)
- leading = (1-b)/(r-g)
PEG: PEG = P/E/g where g is not stated as a decimal
terminal value = trailing P/E*earnings in time t