The trailing Price to Earnings (P/E) ratio is one of the most well-known and widely used ratios for comparing the relative value of stocks. All investors have heard of it, and many are aware of its definition - the current price of a stock divided by a company's earnings per share over the last 12 months. While the effectiveness of this number as a medium to determine stock value has been, and continues to be, debated, many investors will examine the ratio prior to investing in a stock. Retail investors, in particular, tend to place a strong emphasis on the P/E ratio and use it as one of the factors in determining whether a stock is undervalued or overvalued. A quick examination of a company's financial statements, stock price and basic math will yield the number; however, most investors turn to the internet, and the vast selection of financial resources available, to obtain the value. The ratio can be found on almost every financial website and one would expect for it to be consistent across them. An acceptable expectation, but one I found not to be realistic.
For the purposes of this article, let's break down the most common financial internet resources into 3 main categories:
- Category 1 - Investment research websites (eg. Morningstar, Zacks)
- Category 2 - Stock brokerage websites (eg. Scotia iTRADE, E-Trade)
- Category 3 - Financial news websites (eg. Yahoo Finance, Google Finance)
I visited a sample of websites in each of these categories and gathered the trailing P/E ratio for a number of stocks in different industries. They can be found in the table below. I also browsed through the company's financial statements and calculated the ratio myself. I was shocked to see that a ratio, which is based on standard math, varied so largely from website to website. A variance most investors would never note as, unlike analyst opinion, financial ratios should be standard - there would be no reason to examine other resources for a second opinion.
Investors relying on these websites for their financial information or for screening potential investments, may end up missing investment opportunities, or worse, make investment decisions based on erroneous information. Consider an investor who follows a strategy investing in low P/E Stocks. If the investor obtains information from websites in Category 1 and 2, the investor would completely discount Yahoo (YHOO) as a potential investment. Another investor following the exact same strategy and using websites in Category 3, would be delighted to discover Yahoo, a stock with such a low P/E ratio, and would consider investigating it further.
To determine the source of these inconsistencies, we can use the financial statements of one of the companies - Yahoo.
The trailing P/E ratio can be calculated by dividing the stock price by the trailing twelve months [TTM] diluted earnings per share.
Using Yahoo's closing price on December 3, 2012, the trailing P/E ratio would equal 5.6 (18.55/3.29); a number very different from the websites in category 1 and 2, but close to the ones in category 3. To determine how each of the websites is arriving at its version of the P/E Ratio, I attempted to deconstruct the ratio and examine the possibility of inputs. The results can be found in the table below.
(click to enlarge)
I discovered that each website, with the exception of Google Finance, was using different inputs for determining a ratio, which should be based on standard inputs and standard math. Morningstar appeared to be overlooking the EPS from the most recent quarter, while Zacks & Scotia iTRADE were using Non-GAAP numbers for their EPS. The latter is particularly concerning in that I could find no disclosure on Zacks or Scotia iTRADE to inform a potential investor of this practice.
I found Google Finance to be the only site using the correct formula; however that still didn't guarantee a correct trailing P/E. As shown in the graphic above, with my example of Visa (V), Google Finance calculated a trailing P/E of 79.7, while in reality the trailing P/E was 47. The discrepancy could be traced to Google Finance using a Diluted EPS (GAAP TTM) of 2.22, when Visa's 10-K has 3.16.
Ultimately, it is always up to the investor to perform his or her own due diligence. The vast availability of financial resources on the internet can offer investors great tools; however, one should be prudent in not relying on the numbers completely for making investment decisions. There is no substitute for turning to a company's official Quarterly (10-Q) and Annual (10-K) reports and calculating the numbers yourself. Many companies make their reports available on their own websites and the SEC offers an excellent search engine to search for a company's filings at http://www.sec.gov.