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Compute a P/E Ratio

Value Line computes the P/E ratio that appears at the top of the Value Line page (highlighted) using the current price and an earnings figure that includes six months of past performance and six months of anticipated earnings based on the analyst's assessment of current data. In contrast, a trailing P/E is a ratio of the current price to the past year's worth of reported data.

A trailing P/E, which is the number usually reported in the financial press, can sometimes be misleading if you're considering buying a stock, because it does not give you information about future expectations. A company whose earnings are about to fall might appear to be selling at a modest P/E based on reported data. But if, in fact, the company reports a big drop in earnings in the near future, the price may also drop and any advantage offered by the modest P/E will disappear. That is the type of information a Value Line analyst is alert to, and the information can influence a P/E that includes six months of projections.

Value Line also provides the 10-year median P/E that puts the recent P/E in historical perspective. This information shows what investors have been willing to pay for a stock in the past. If the current P/E is higher than that median, it suggests that investors are optimistic that the company's earnings will grow.

Remember, though, that general economic conditions and the momentum of the stock market itself also exert a major impact on stock prices and therefore on P/E ratios. If valuations in general are high, a company's current stock price may be higher than it might be in more "normal" times.

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