Conventional PE:
Generally, a conventional PE calculation is by using the current closing price, and divided by the total earning per share of last financial year. Theoretically, its sounded logic, but however, it might be too late to reflect the price changes with last years financial performance. For example, now it is the end of October, 2009, and to calculate a conventional PE, we uses today's closing price and divide it by last years earning per share, to get a ratio. But to use last year's ratio to evaluate current price, which is 10 months apart, may seem out dated. Therefore, the reflection of the true financial chances and price changes can be unrealistic.
4 Quarters Rolling PE:
This is another approach in calculating PE, by using the last 4 quarters earning per share. Therefore, this approach is generally “closer to date” as it utilize the latest 4 quarters earning, to reflect with the current price, thus provide a better evaluation.
Leading PE:
Leading PE is another way of calculating PE, by using only the available earning per shares for the current financial year, by actualizing the current 4 quarters earning, assuming that the result should remains unchanged. For example, if a company currently only has two quarters of financial result available, Leading PE calculate the available Earning by multiplying by 2, to get an assumed total earning per share for 4 quarters. This method is purely for projection based on the behavior of the earning history of a company. Generally, when Leading PE is used together with 4 Quarter rolling PE, analysts can find out whether the company's earning is improving or not.
Other types of PE:
Other than the above three types of PE, there are also PE based on projection by estimated future earnings of a company, which is being used by Fund managers or research houses. However, to calculate this kind of PE, a huge amount of data and professional knowledge is required, and therefore, not suitable for retail investors.
Case Study on Different types of PE: Genting
Let us take a closer look of different PE calculation by using Genting as case study.
Table 1: Genting – 3182, Latest Quarterly Financial Summary.
As shown on Table 1, except for the 3rdand 4thquarters of the financial year end 2008, Genting has been making profit consistently for many years, and therefore, the losses in 3rdand 4thquarters in the year 2008 will affect the Price earning ratio drastically.
Conventional PE:
Table 2: Genting Conventional PE Calculation.
As shown on Table 2, a conventional PE calculate the ratio by using current closing price, and divided by last year's total earning per share. Based on the information, last year's total earning per share was 15.37 sen, and with the closing price on the 21/10/2009, the conventional PE for Genting should be 49.84 times. However, this is the current price movement (October 2009) with the earning power of last year (2008) which is 10 months apart. Therefore, the ratio may seem outdated. Let us take a look at another way of calculating PE for Genting.
4 Quarters Rolling PE:
Table 3: 4 Quarters Rolling PE for Genting.
As shown on table 3, the total earning per share for the latest 4 rolling quarters is 7.21 sen, with the closing price of 21/10/2009, the 4 quarter rolling PE is 106.24 times. This is because the 4 quarter rolling earning per share is much weaker than last year's earning per share.
Leading PE:
Table 4: Leading PE for Genting
As shown on table 4, there are only two available quarters for the year 2009, and therefore, we shall multiply the earning per shares for the existing 2 quarter by 2, to get a annualized total earning per share of 23.14 sen. With the closing price of 21/10/2009, the Leading PE is 33.1 times.
As you can seen the Leading PE is much lower than the 4 Quarter Rolling PE, this suggests that the current earning of Genting is improving, thus provided that the earnings for the coming quarters should remain unchanged, price of genting will be seem too expensive, relatively. In short, when Leading PE is lower than the 4 Rolling Quarters PE, this suggests that the company earning is improving. On the other hand, if the Leading PE is higher than the 4 Quarters Rolling PE, it suggests that the current earning of the company is weaker.
Meanwhile, Leading PE is also good for newly listed company, or company which does not have a complete 4 quarters earning. While other types of PE calculation requires at least 4 quarters or earning.
Behavior of PE in the Bull / Bear run.
Chart 1: Genting chart from 2008 to end of October, 2009.
As indicated by A, price of Genting touched its lowest point in March, 2009, and soon, it formed an uptrend, with the 14, 21, 31 EMA supporting the uptrend, entering a bullish trend. When stock price is rising in a bullish market, price usually move faster than the announcement of any improving earnings, and therefore, the PE will be higher in general, this is a sign of a bull market. On the other hand, when price is moving in a downtrend or a bear market, the dropping of price is faster ahead than the announcement of poorer results, thus the PE will be lower, this is a common characteristic of a bearish market.
Therefore, investors should never make any buy decision based on only PE, but instead, a thorough analysis has to be done, including dividend yield, Not profit ratios, etc, and not to mention the importance of technical analysis to fine tune the entry point and trading plan.
Conclusion:
Since there are many different types of PE calculation, investors must understand the advantages and disadvantages of each type of PE. However, in reality, timing is everything, and therefore, it is crucial to obtain the latest up-to-date information for analysis. Of course, fund managers can research and estimate earning and target price, but this is not practical for retail investors. Nonetheless, no matter which types of PE, investors must learn how to apply them properly.
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