A popular fundamental analysis is the P/E Ratio or the Price/Earnings Ratio. This commonly used by typical stock traders in evaluating the performance of a certain company. Comparing the P/E of competing companies in the same industry means a reliable comparison can be created.
A close cousin to the EPS, the price/earnings(P/E) ratio determines how closely a stock's price follows its actual earnings per share.The higher the P/E ratio, the more investors and traders are anticipating that a stock's price will continue to rise. As the P/E ratio of a stock starts to fall, market prices will soon follow suit. Price-to-earnings is calculated by the following formula:
(Market price per share) / ( EPS )
As seen from above, the formula takes into account both the actual price of the stock and the estimated EPS. If a weighted average is used, time is also taken into account.
There are two main types of P/E ratios that are used by analysts. The trailing P/E will give you an idea of how the stock has performed over the past, whie the forward P/E is based off of future estimated earnings.
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