Share prices are determined by market supply and demand, and thus depend upon the expectations of buyers and sellers. Among these are:
-The company's future and recent performance
-New product lines
-Prospects for companies of this type, the "market sector"
-Prevailing moods & fashions.
By dividing the price of one share in a company by the profits earned by the company per share, you arrive at the P/E ratio. If earnings move up in line with share prices (or vice versa) the ratio stays the same. But if stock prices gain in value and earnings remain the same or go down, the P/E rises. For example, if a stock price was $70 per share and it got $2 in earnings, the P/E is 35, historically high.
The price used to calculate a P/E ratio is usually the most recent price. The earnings figure used is the most recently available, but this figure is often a year old and does not necessarily reflect the current position of the company. Many times, you will hear this referred to as a trailing P/E, because it involves taking earnings from the last four quarters.
It is possible, however, to use the earnings estimate for the next four quarters. When doing so, the ratio is referred to as a projected or forward P/E.
