The truth about P/E

The use of the “historical average” for the stock market’s price/earnings ratio is one of the most flawed oversights (or distortions!) in stock market research.

Too often, the current P/E is calculated using an updated version of earnings for a future date (forward operating earnings).

The forward-looking, earnings-adjusted P/E is then compared to the historical average P/E based on the previous year’s as-reported net income.

P/E based on trailing as-reported earnings ranges from 15 to 16 (depending on the period), while P/E based on forward operating earnings ranges from 11 to 12 (depending on the period).

This graph depicts the past of forward operating P/E in a more practical way.