Putting the E Back in P/E Ratios

Abstract

While analysts provide an important source of information in today's markets, they also offer an array of confusion when their commentary is followed with a reference to a relatively simple valuation metric; the price earnings ratio. In bull markets, analysts appear prophetic for their knowledgeable forecast and valuation becomes a matter of what color fairy dust the analyst prefers. However, in bear markets, investors question why their foresight failed.

This paper considers the impact that 'Street' earnings (pro forma or operating earnings) have on price earnings multiples. A relatively simple calculation of the P/E ratio can differ dramatically when pro-forma earnings become part of the equation.

Keywords: P/E Ratio's Pro Forma Earnings