|  DEC 1991

Combining P/E Ratio With Earnings Growth Rates by Pamela H. Brown and William G.S. Brown

Combining P/E Ratio With Earnings Growth Rates by Pamela H. Brown and William G.S. Brown The price/earnings (P/E) ratio is widely used in fundamental stock analysis. It serves to normalize earnings so that stocks with widely varying earnings may be compared reasonably. The P/E ratio of a market index such as the Standard & Poor's 500 composite stock price index typically remains within certain boundaries. When investors are pessimistic and the market seems to have nowhere to go but down, the market P/E will be near 7. When confidence is high and investors view the market as having no place to go but farther up, the market P/E will be near 17. Historically, these parameters have held and, once reached, the market has indeed reversed. The price/earnings ratio is commonly defined as:

by Pamela H. Brown and William G.S. Brown