Ask Colin

There are many PE ratios published. Which is the best one to use?

The PE ratio that I regard as the gold standard is the price divided by the earnings per share for the last two half years. Thus, it is a rolling 12-month multiple. I think that this is the most generally accepted definition and one we would first look to use in most situations, but not all.

However, there are many different ratios used by various analysts. None of them are right or wrong per se. The key principle in analysis is to use the ratios that best suit the purpose of the analysis. So, every situation calls for thought before blindly using any given ratio.

Note particularly that banks and insurance companies require quite different ratios and analysis to industrial and service companies.

Price earnings ratios are always inappropriate for resources companies or other very cyclical businesses. This is because the price earnings ratio is only applicable as a valuation measure is you can reasonably expect a constant level of earnings into the future. Where there is minimal growth, we work to a lower multiple than in a growth company.

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