A stock's average price to earnings ratio over the trailing five-year period. It is calculated by adding the P/E ratios of the company for each fiscal year for the past five fiscal years, then dividing the sum by five. If the P/E ratio for a given year exceeds 150, its value is capped at 150 when calculating the average.
Benefit
By looking at the five-year average P/E alongside the current P/E, you can quickly tell whether a company is currently valued above or below its average P/E.
Origin
The company’s prices are received from Comstock. The company’s earnings are found in the annual and quarterly income statements for each period. Total shares outstanding is taken from the company’s 10-K forms for each period.
For the Pros
Use the following formula to look for companies that trade at a discount to their historical valuations. The same equation can be used with Price/Book, Price/Sales and Price/Cash Flow:
PE Current / PE 5-Year Average