Financial Terms Price/earnings ratio (PE ratio)

# Definition of Price/earnings ratio (PE ratio)

## Price/earnings ratio (PE ratio)

Shows the "multiple" of earnings at which a stock sells. Determined by dividing current
stock price by current earnings per share (adjusted for stock splits). earnings per share for the P/E ratio is
determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher
"multiple" means investors have higher expectations for future growth, and have bid up the stock's price.

# Related Terms:

## price/earnings ratio (price to earnings ratio, P/E ratio, PE ratio)

This key ratio equals the current market price
of a capital stock share divided by the earnings per share (EPS) for the
stock. The EPS used in this ratio may be the basic EPS for the stock or its
an undervalued stock or may reflect a pessimistic forecast by
investors for the future earnings prospects of the business. A high P/E
may reveal an overvalued stock or reflect an optimistic forecast by
investors. The average P/E ratio for the stock market as a whole varies
considerably over timeâ€”from a low of about 8 to a high of about 30.
This is quite a range of variation, to say the least.

## Price to Earnings Ratio (P/E, PE Ratio)

A measure of how much investors are willing to pay for each dollar
of a company's reported profits. It is calculated by dividing the
market price per share by the earnings per share.

## PPF (periodic perpetuity factor)

a generalization formula invented by Abrams that is the present value of regular but noncontiguous cash flows that have constant growth to perpetuity.

## Accounting earnings

earnings of a firm as reported on its income statement.

## Acid-test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.

## Annual fund operating expenses

For investment companies, the management fee and "other expenses,"
including the expenses for maintaining shareholder records, providing shareholders with financial statements,
and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

## Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5%
quarterly return has an APR of 20%.

## Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).

## Annualized holding period return

The annual rate of return that when compounded t times, would have
given the same t-period holding return as actually occurred from period 1 to period t.

## Appraisal ratio

The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard
deviation.

## Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.

## Articles of incorporation

Legal document establishing a corporation and its structure and purpose.

A dealer's price to sell a security; also called the offer price.

## Asset/equity ratio

The ratio of total assets to stockholder equity.

## Asset activity ratios

ratios that measure how effectively the firm is managing its assets.

## Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

## Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

## BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.

## Basis price

price expressed in terms of yield to maturity or annual rate of return.

## Biased expectations theories

Related: pure expectations theory.

## Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

## Book value per share

The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

To buy at the beginning of a trading session at a price within the opening range.

## Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

## Call price

The price for which a bond can be repaid before maturity under a call provision.

## Capital expenditures

Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

## Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

## Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.

## Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

## Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.

## Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.

## Cash flow per common share

Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.

## Cash ratio

The proportion of a firm's assets held as cash.

## Cheapest to deliver issue

The acceptable Treasury security with the highest implied repo rate; the rate that a
seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

## Clean price

Bond price excluding accrued interest.

## Commercial paper

Short-term unsecured promissory notes issued by a corporation. The maturity of
commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.

## Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s performance Presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR performance
Presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.

## Common stock ratios

ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

## Company-specific risk

Related: Unsystematic risk

## Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans
extended or services provided.

## Competence

Sufficient ability or fitness for ones needs. Possessing the necessary abilities to be qualified to
achieve a certain goal or complete a project.

## Competition

Intra- or intermarket rivalry between businesses trying to obtain a larger piece of the same
market share.

## Competitive bidding

A securities offering process in which securities firms submit competing bids to the
issuer for the securities the issuer wishes to sell.

## Competitive offering

An offering of securities through competitive bidding.

## Compounding period

The length of the time period (for example, a quarter in the case of quarterly
compounding) that elapses before interest compounds.

## Concentration account

A single centralized account into which funds collected at regional locations
(lockboxes) are transferred.

## Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.

## Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

## Contingent pension liability

Under ERISA, the firm is liable to the plan participants for up to 39% of the net
worth of the firm.

## Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.

## Conversion parity price

Related:Market conversion price

## Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.

## Conversion ratio

The number of shares of common stock that the security holder will receive from
exercising the call option of a convertible security.

## Core competency

Primary area of competence. Narrowly defined fields or tasks at which a company or
business excels. Primary areas of specialty.

## Corporation

A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.

## Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

## Coverage ratios

ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

## Crawling peg

An automatic system for revising the exchange rate. It involves establishing a par value around
which the rate can vary up to a given percent. The par value is revised regularly according to a formula
determined by the authorities.

## Credit period

The length of time for which the customer is granted credit.

## Current ratio

Indicator of short-term debt paying ability. Determined by dividing current assets by current
liabilities. The higher the ratio, the more liquid the company.

## Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.

## Days' sales in inventory ratio

The average number of days' worth of sales that is held in inventory.

## Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

## Debt ratio

Total debt divided by total assets.

## Debt-service coverage ratio

earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

## Declaration date

The date on which a firm's directors meet and announce the date and amount of the next
dividend.

## Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.

## Dependent

Acceptance of a capital budgeting project contingent on the acceptance of another project.

## Direct paper

Commercial paper sold directly by the issuer to investors.

## Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.

## Discount period

The period during which a customer can deduct the discount from the net amount of the bill
when making payment.

## Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.

## Dividend payout ratio

percentage of earnings paid out as dividends.

## Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.

## Dividends per share

Dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.

## Dollar duration

The product of modified duration and the initial price.

## Dollar price of a bond

percentage of face value at which a bond is quoted.

## Domestic International Sales Corporation (DISC)

A U.S. corporation that receives a tax incentive for
export activities.

## Duration

A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

## Earnings

Net income for the company during the period.

## Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

## Earnings per share (EPS)

EPS, as it is called, is a company's profit divided by its number of outstanding
shares. If a company earned \$2 million in one year had 2 million shares of stock outstanding, its EPS would
be \$1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Plowback rate.

## Earnings surprises

Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.

## Earnings yield

The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.

## Economic dependence

Exists when the costs and/or revenues of one project depend on those of another.

## Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

## Economies of scope

Scope economies exist whenever the same investment can support multiple profitable
activities less expensively in combination than separately.

## Edge corporations

Specialized banking institutions, authorized and chartered by the Federal Reserve Board
in the U.S., which are allowed to engage in transactions that have a foreign or international character. They
are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to
organize and own and Edge corporation.

## Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

## Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

## Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

## European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies,
originally devised in 1979.

## European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

## European option

Option that may be exercised only at the expiration date. Related: american option.

## European Union (EU)

An economic association of European countries founded by the Treaty of Rome in
1957 as a common market for six nations. It was known as the European Community before 1993 and is
comprised of 15 European countries. Its goals are a single market for goods and services without any
economic barriers and a common currency with one monetary authority. The EU was known as the European
Community until January 1, 1994.

## European-style option

An option contract that can only be exercised on the expiration date.

## Euro-commercial paper

Short-term notes with maturities up to 360 days that are issued by companies in
international money markets.