Curious Cat Investing Dictionary: PE ratio

PE ratio (Price to Earnings ratio) - Stock price divided by per share earnings over the past year. For the PE ratio the actual earnings are used (official announced earnings not projected earnings). The earnings per share figure to use are the "fully diluted earnings."

Fully diluted earnings are calculated by assuming that all options are exercised as well as any convertible securities. Normally fully diluted earnings will be a few cents less per share than undiluted earnings (if the difference is larger that indicates there are a large number of potential shares of stock outstanding as options, warrants or convertible bonds).

• Forward PE Ratio - Stock price divided by estimated earnings in the next 12 months (or for a fiscal year for which actual earnings are not yet available.
• option - the right to purchase shares of stock at a given price (called the "strike price"). Options are quoted in 100 share lots.
• warrants - long term options. Exactly the same as options, but when they are longer term (over a year) they are often called warrants (though referring to them as options is also common)
• convertible bond - a bond with the extra benefit of giving the holder the right to convert the bond into shares of stock. Thus if the stock prices rises the shares of stock it represent may provide more value than the right to receive interest from the company.
• Price/Cash Flow Ratio

Curious Cat Investing Library
Dictionary: PE ratio, Dollar Cost Averaging , Balance Sheet
Topics: China - Economics - Real Estate - Trading
Great Investors Focus: Darvas - Livermore - O'Neil - Soros
Authors: Levitt - Schwager Investment Bookstore