P/E Ratio

The P/E ratio, thrust into prominence during the 1930s by value investors Benjamin Graham and David Dodd, measures the amount of money investors are paying for a company's earnings. Typically, companies that post strong earnings growth enjoy richer stock prices and fatter P/E ratios than those that don't.

Typically, P/E ratio can be trailing (based on the last 12 months earning results) or forward (based on analyst expection of the next 12 earning results).

If the last twelve months have been a bumper year for the company (especially if there one-time gains), the trailing P/E ratio may look very good, but you have to discount it quite a bit if you are considering to buy at this stage.

If the last twelve months have been very bad for everybody (like March 2009), the trailing P/E ratio may look worse than they really are.  If the company is fundamentally sound, this may be a good buy opportunity though P/E may look lousy.

As for forward P/E ratio, the general rule will be to always discount it to some degree when the mood is bullish. Analysts are always too bullish or pessimistic. How come few analyst cry out for "Buy" in march 2009??

P/E ratios fell sharply during the Great Recession (2009/2009), Sars and 1997/1998 crisis.

If corporate borrowing costs remain at record lows and specific stock prices remain lower than expected, companies will start issuing debt to buy back shares from the market. Recently, you would SingPost doing a lot of share-back after raising fund from the debt market.

Always remember, a stock is only worth its future earnings, but it involves uncertainty. This explains the need to have a "margin of safety" in value stock investing.