If you watch the business channels and many people do, often times people discuss the price-to-earnings ratio or PE Ratio. Similar to all ratios, they are designed to help you evaluate or compare apples to apples. In a column by John Heinzl, he writes about PE ratios.

The PE Ratio is calculated by dividing the share price by the earnings, often times it is last year. Thus the term is trailing 12 months P/E.

What happens if you use last year’s earnings, the first concern it is a net earnings which means there could be one time considerations or non recurring items in the earnings. It means you need to look at the company’s earnings to see if there was one time expenses in their earnings.

The second consideration is looking backwards, while a very good indication the P/E does not reflect this year’s earnings outlook. Is the company expected to do better this year? does it have a history of raising it dividends? All stocks which earn a dividend have an analyst or more following them, what do they think?

It is important to note generally companies which are growing rapidly tend to have higher P/E Ratios, while slower growth companies have lower P/E Ratios.

Linking to dividend paying stocks, which looks easy sometimes is a little more complicated than at first glance. It is a good idea not to make your decisions based on one variable, but look at a number to be satisfied you have made a good decision.

There are more questions than answers, till the next time – to raising questions.