# Best practice approach for calculating the PE-ratio

I am trying to calculate the historical PE ratios of a stock, but which date should I use to get the stock price in calculating the PE ratio?

My current approach is to use the stock price of a day after the stock's financial results are released. My rationale is the market will take a day to react to the stock's financial results, and the stock price will adjust accordingly, assuming that the market is efficient.

For example, if the stock's financial earning is annouced on 1 Feb 2010, I will take the stock price on 2 Feb 2010 to calculate the PE ratio.

Does this make sense?

• It depends on what you want to analyse. Your approach has some merit - on the otherhand you would not see whether the stock was over- or undervalued. E.g. lets say a stock trades at 100 and the EPS turns out to be 10. After the information has been released the stock climbs to 120. Thus in the pre-earnings-announcment world the stock was somewhat undervalued, afterwards that might no longer be the case for markets can react pretty fast. – Probilitator Feb 27 '14 at 12:48
• @Probilitator Thank you for your interesting insights. Yes, it really depends on what I want to analyse – Michael Mar 1 '14 at 13:56
• and what do you want to analyse? Perhaps you could also rephrase your question to "Best practice approach for calculating the PE-ratio" - you could then apply this method to the historical data. Also I would be interested in seeing a "citeable" reference - perhaps someone here knows one – Probilitator Mar 1 '14 at 14:03
• @Probilitator Yes, I also wonder if there is research on this area. Perhaps there should be two types of PE ratio, pre-annoucement PE ratio and pos-annoucement PE ratio. It will give us different perspectives of the stock. – Michael Mar 1 '14 at 14:10

According to this reference there are indeed several types of P/E-Ratios (trailing P/E that is based on previous earnings and forward P/E which is based on projected earnings)

Also several books calculate the P/E according to the following formula

$P/E-Ratio = \frac{Average Common Stock Price}{Net Income Per Share}$

(Confer source1, source2 and source3)

Unfortunately I couldn't find how the average-stock-price ist supposed to be calculated. (Does one use a rolling average and if that is the case with which time-window ) Some accounting figures and assumptions also seem to be involved into calculating this performance indicator.

Here I also found an interesting comment cautioning that in case of a very volatile stock one should use the latest stock price to get a meaningful P/E-Ratio

• According to link, the average stock price is calculated by taking the average of the highest and lowest price of a selected period. I think different approaches on determining the price each have its pros and cons, but I could not find any research paper discussing on it. – Michael Mar 1 '14 at 16:35
• this looks only marginally trustworthy - but ist still something. I am quite confused that it is so hard to find. There must be some market standard. – Probilitator Mar 1 '14 at 16:50