Lower Is Better

QIs it better for a company’s forward price-to-earnings (P/E) ratio to be higher or lower than its current P/E ratio? — H.D., Springfield, Illinois

ALower is generally better. The current P/E ratio is the company’s current stock price divided by its earnings per share (EPS) for the trailing 12 months — so it’s backward-looking. The forward, or projected, P/E ratio divides the stock price by next year’s estimated EPS.

When the forward P/E ratio is lower than the current one, it reflects that earnings are expected to rise. For example, if the Whoa, Nellie Brake Co. (ticker: HALTT) is trading at $60 per share with EPS over the past year of $3, its P/E would be 60 divided by 3, or 20. If it’s expected to generate $4 in EPS next year, its forward P/E would be 60 divided by 4, or 15.

A lower forward P/E is promising, but it might just be due to unusually low earnings in the past year. And earnings estimates sometimes turn out to be wrong. Never make any investment decision based on just one measure, or even just a few.

QHow does one begin researching a company? — L.F., Pensacola, Florida

ACall and ask its Investor Relations department to send you an “investor’s package,” which should feature the latest annual and quarterly reports and usually more.

Better still, gather that information — and more — online, starting with the company’s website. Most major companies have very informative websites; check out sections with labels like “About Us,” “For Investors” and “News.”

Presentations made by executives can be very informative. You can also look up news reports and articles using Google Search and Google News.

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