Author Topic: Understanding Price to Earnings Ratio Through History  (Read 1951 times)

Xlar

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Understanding Price to Earnings Ratio Through History
« on: May 30, 2017, 01:59:29 PM »
I keep hearing that the P/E ratio is high and that is the justification that is used to say that the S&P500 is too high (inflated?) and that we're due for a crash. Forgetting all the nonsense about whether or not we're due for a crash (personally I don't think it can be predicted). I am trying to understand how the P/E ratio is calculated and how the use of P/E has changed over time.

I have heard that there are accounting changes to how the earnings of a company are calculated. This seems to be true but I haven't been able to figure out the impact.

The other thing that I've been wondering about is this: Take Amazon for example. They reinvest almost all their $$$ back into new products and therefore have very little to no earnings. This has given them a very high P/E. Have companies historically done this? Earned tons of $$$ but reinvested it and said they earned almost nothing? Could this explain why P/E ratios are so high now compared to the historical data?

Thanks for taking the time to answer my silly questions!

MDM

  • Senior Mustachian
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Re: Understanding Price to Earnings Ratio Through History
« Reply #1 on: May 30, 2017, 06:20:29 PM »
I am trying to understand how the P/E ratio is calculated and how the use of P/E has changed over time.
You might go through A different look at the Shiller CAPE 10 - Bogleheads.org and links therein for various perspectives.

 

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