Using the Price-to-Earnings Harmonic Mean to Improve Firm Valuation Estimates

Journal of Financial Education, Volume 36, Fall/Winter 2010

13 Pages Posted: 22 Jun 2015

See all articles by Pankaj Agrrawal

Pankaj Agrrawal

University of Maine

Richard H Borgman

University of Maine

John M. Clark

University of Southern Mississippi - College of Business Administration - Economics, Finance, & International Business

Robert Strong

University of Maine - Department of Public Policy and Health

Date Written: October 21, 2010

Abstract

This paper reviews some well-known options to estimate the portfolio average of the price-earnings (P/E) multiple, emphasizing the logic and calculation of the harmonic mean. The harmonic mean is a useful but oftentimes unfamiliar calculation to many students and professionals. The simple arithmetic mean when applied to non-price normalized ratios such as the P/E is biased upwards and cannot be numerically justified, since it is based on equalized earnings. The paper advocates the use of the classic harmonic mean when the need is for an equal-dollar-weighted average and the weighted-average harmonic mean when the need is for an index style market-weighted average.

Keywords: P/E ratio, P/E multiple, portfolio PE, portfolio P/E, harmonic mean versus arithmetic mean versus geometric mean

JEL Classification: G

Suggested Citation

Agrrawal, Pankaj and Borgman, Richard H and Clark, John Michael and Strong, Robert, Using the Price-to-Earnings Harmonic Mean to Improve Firm Valuation Estimates (October 21, 2010). Journal of Financial Education, Volume 36, Fall/Winter 2010. Available at SSRN: https://ssrn.com/abstract=2621087

Pankaj Agrrawal (Contact Author)

University of Maine ( email )

Orono, ME 04469
United States

Richard H Borgman

University of Maine ( email )

Orono, ME 04469
United States

John Michael Clark

University of Southern Mississippi - College of Business Administration - Economics, Finance, & International Business ( email )

USM Box 5072
Hattiesburg, MS 39406
United States
601-266-5766 (Phone)
601-266-4920 (Fax)

Robert Strong

University of Maine - Department of Public Policy and Health

Orono, ME 04469-5774
United States

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