10 October 2008

A Long-Term P/E Ratio

An Economix post today by David Leonhardt compares, with a twist, the market's current price/earnings multiple to historic norms.  The twist is that the denominator is the average earnings over the last five years.

Leonhardt calculated that this multiple is the lowest it has been since 1985.  By this measure, in other words, stocks are the least expensive they have been for a generation.

As we have noted previously, GCFR is leery of published P/E ratios because we don't know what gains and losses have been excluded from earnings.  There are also opportunities for management to pump up earnings temporarily if that suits their purposes.  A five-year average should provide a truer view of profits.

We'll consider adding this ratio to our dashboard.

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