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These days everyone seems to own a piece of the stock market, whether it's a 401(k) plan, an IRA mutual fund, or an online brokerage account. Terms like "P/E ratio," once the exclusive province of analysts and brokers, have become a part of regular water-cooler chatter. Our first stop was Yahoo! Finance and its handy Glossary, found under the "Reference" heading. There we clicked on the "P" to find the alphabetical listing for the term. Here's what it said: "P/E ratio
Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year: $25.50 = 10 times $2.55. XYZ stock sells for 10 times earnings. P/E = Current stock price
divided by trailing annual earnings per share or expected annual earnings per share." A good start, but we weren't exactly clear on "trailing annual earnings." That prompted us to go searching for a second opinion. Looking for a dedicated, all-purpose finance site, we browsed our way to Money.com and searched for the phrase "P/E ratio." The first result was "Money 101: Investing in stocks," which provided a more explicit definition and some insight into why P/E ratios are so important: "Price/earnings ratio
A stock?s price divided by its earnings per share. The higher the P/E ratio, the higher the expectation that earnings will continue to grow at
a rapid pace. Traditionally, investors have looked at P/Es based on the previous 12 months? profits, known as trailing earnings. Today, though, investors commonly cite P/Es based on the consensus analysts' forecast of the next 12 months? profits, or forward earnings. The rationale for this change is that forward P/E is a better reflection of a stock's future value -- and that, after all, is what you're buying when you invest in stocks. But take care: all projections involve guesswork and analysts frequently err on the high side when making such forecasts."
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