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  5. MISC: Hi 5i Team - Price per Earnings and forward P/E is often used as a measure of valuation for a stock. [Miscellaneous]
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Q: Hi 5i Team - Price per Earnings and forward P/E is often used as a measure of valuation for a stock. Also I am assuming that when someone talks of a company trading at 20 times earnings they are referring to this ratio. However I have never been completely sure about what this means. Does earnings mean EBITA. Could you elaborate on the exact meaning of earnings.

Secondly is this the best measure of a company's success, at least for investment purposes, or is there another metric (or more) that gives a better insight into the valuation of a company.

I've never seen a price per profit ratio so here's the third part of this question. Does something like this exist or is there a similar ratio that would help in evaluating a company's performance.

Thank you.


Asked by Rob on March 19, 2025
5i Research Answer:

There is debate on which metric is 'best'. Many like price/cash flow, as earnings often will contain one-time charges and differing accounting credits/debits. Cash flow is also less easily manipulated than earnings. Earnings is not the same as adjusted earnings or EBITDA, as the latter includes interest and taxes. EBITDA can be useful in comparing companies with differing capital structures (i.e. showing financials without the impact of debt interest or different tax rates). When we reference P/E we are typically referencing forward adjusted earnings. This allows for adjustments on some items, such as stock based compensation charges. It tries to look at valuation based on 'normalized' earnings expectations. Price per profit is essentially the same as P/E, though there can be various definitions of 'profit'.