Show BUSINESS t I ll SAISON-S SAISON t SPORTS INC RICE PRICE RATIO As Indicated by the widespread use of expected corporate earnings as a main Ingredient of common stock evaluation the relationship between a stocks stock's price and what the company earns Is now considered of primary importance Importance Im and worthy of oC careful i r Appearing In most dally daily stock price earnings ratios ire ere gaining acceptance as thus far the most basic uniform measure of this im relationship Mathematically the ratio is simply a stocks stock's price divided by the share per-share earnings reported over the most recent month 12 accounting period As an example a stock priced at gt 20 on July I 1977 that posted most recent earnings of 2 per share for the 12 months ended March 31 1977 assuming second-quarter second results are not yet available would have a P-E P of oC 10 By making allowances for forthe forthe forthe the time necessary to compile earnings in the manner just described P-E P ratios can also be computed for Cor market indexes in in- INVESTMENT MERITS l In the earlier example the PE PE P P- E of 1 10 is little more than an indication that the stock is trading at 10 times earnings But when viewed in its historical perspective this earnings multiple may be well above or below its range long-range average a situation that may suggest heightened optimism or pessimism on the part of in in- Consider for instance an issue that has traded at an average multiple of oC 12 for the past 10 years but presently sports a P-E P of oC 5 In this case the stocks stock's price has either fallen by a proportionately greater margin than earnings or earnings have risen rise by a proportionately greater margin than price A look at the company's earnings record will quickly reveal which combination applies If increases in per per- share earnings that were not accompanied by proportionately proportionately proportionately equal price gains are found to be responsible for this historically low P-E P then perhaps perhaps just just perhaps perhaps an an undervalued situation has been disclosed The reasoning behind this assumption is quite basic Namely if the upward trend in earnings continues additional additional additional ad ad- downward pressure will be exerted on the already low P-E. P Such an occurrence would enhance the probability of oC an upward adjustment in price a subsequent event that would check the P-E's P d decline cline restore statistical normalcy and provide investors with a profitable situation Now assume a similar but butmore butmore butmore more typical case where earnings earnings earnings ear ear- are likely to contra contract t. t Here the expected profit slump has already been discounted in inthe inthe inthe the stocks stock's price thus explaining explaining explaining ex ex- ex- ex the historically low P PE PE P P- E that reflects high but untenable un un- untenable tenable profits If expectations prove correct and earnings do fall the P-E P will be adjusted upward but there will not necessarily be beany beany beany any appreciation in the stocks stock's price So the relation relationship between the issues issue's price and its earnings has been bell corrected but the investor has reaped little if any reward |