New York - A price earnings ratio (PE) is calculated by dividing the market price per share by a current or projected annual earnings per share. It measures the market's expectations regarding earnings growth potential and risk.
There is a significant diversity among financial institutions and newspaper organizations as to the definition of earnings. For instance, note the following:
- The Associated Press and the New York Times use earnings for the most recent four quarters.
- Dow Jones publication such as the Wall Street Journal and Barrons adjust earnings to exclude write-offs and other one-time extraordinary events.
- Other organizations such as S&P and most brokerage houses uses projected earnings based on the theory that stocks trade on expectations rather than on history.
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