Different PE ratios

Estimated EPS is based on a number of assumptions about the behaviour of revenues and costs. The reliability of the EPS forecast hinges critically on how realistic are these assumptions.

The other half of the valuation exercise is concerned with the price-earnings ratio which reflects the price investors are willing to pay per cents of EPS. In essence, it represens the market's summary evaluation of a company's prospects

Note that different PE ratios can be calculated for the same stock at any given point in time:

PE ratio based on last year's reported earnings
PE ratio based on trailing 12 months earnings
PE ratio based on current year's expected earnings
PE ratio based on the following year's expected earnings

An example may be given to illustrate the different PE ratios. The equity stock of ABC Limited is trading on August 1, 20x5 for MR 120 and the following EPS data is available:

EPS for last year (April 1, 20x4 - March 31, 20x5): 8 sen
EPS for trailing 12 months (July1, 20x4 - June 30, 20x5): 8.5 sen
EPS expected for the current year (April 1, 20x5 - March 31, 20x6): 9 sen
EPS expected for the following year (April 1, 20x6 -March 31, 20x7): 10 sen

The different PE ratios are as follows:

PE ratio based o last year's reported earnings: 120/8 = 15.0
PE ratio based on trailing 12 months earnings: 120/8.5 = 14.1
PE ratio based on current year's expected earnings: 120/9.0 = 13.3
PE ratio based on the folowing year's expected earnings: 120/10.0 = 12.0

We will generally use the PE ratio based on current year's expected earnings.