<P> Some people mistakenly use the formula market capitalization / net income to calculate the P / E ratio . This formula often gives the same answer as market price / earnings per share, but if new capital has been issued it gives the wrong answer, as market capitalization = market price × current number of shares whereas earnings per share = net income / weighted average number of shares . </P> <P> Variations on the standard trailing and forward P / E ratios are common . Generally, alternative P / E measures substitute different measures of earnings, such as rolling averages over longer periods of time (to attempt to "smooth" volatile or cyclical earnings, for example), or "corrected" earnings figures that exclude certain extraordinary events or one - off gains or losses . The definitions may not be standardized . For companies that are loss - making, or whose earnings are expected to change dramatically, a "primary" P / E can be used instead, based on the earnings projections made for the next years to which a discount calculation is applied . </P> <P> The price / earnings ratio (PER) is the most widely used method for determining whether shares are "correctly" valued in relation to one another . But the PER does not in itself indicate whether the share is a bargain . The PER depends on the market's perception of the risk and future growth in earnings . A company with a low PER indicates that the market perceives it as higher risk or lower growth or both as compared to a company with a higher PER . The PER of a listed company's share is the result of the collective perception of the market as to how risky the company is and what its earnings growth prospects are in relation to that of other companies . Investors use the PER to compare their own perception of the risk and growth of a company against the market's collective perception of the risk and growth as reflected in the current PER . If the investor feels that his perception is superior to that of the market, he can make the decision to buy or sell accordingly . </P> <P> Since 1900, the average P / E ratio for the S&P 500 index has ranged from 4.78 in Dec 1920 to 44.20 in Dec 1999 . However, except for some brief periods, during 1920--1990 the market P / E ratio was mostly between 10 and 20 . </P>

Low price to earnings ratio what does it mean