price-profit ratio, PPR): The relationship between a company’s stock quotation on the stock exchange and its earnings; unless otherwise defined, it is based on earnings per share before taxes and a twelve-month period (price per share of a stock, divided by its last twelve months of earnings). – With the help of this ratio, it is believed that the investment potential (the prospect that investors will turn to this stock) of companies can be compared. The P/E ratio is therefore given special attention by some stock market observers and fund managers when making decisions and forecasts. – The difficulty, however, lies in the fact that the reporting of profit by a stock corporation involves a great many uncertainties, such as: Creation and release of hidden reserves; changes in payment terms; one-time extraordinary income (income from discontinued operations) or expenses; differences in the scope of consolidation with respect to group companies; advance tax payments or repayment of tax liabilities from previous periods; and a number of other circumstances. These uncertainties exist even if the balance sheet has been prepared strictly in accordance with IFRS. – In the USA, the P/E ratio for the 500 largest listed companies averages close to fifteen over the long term, albeit with strong fluctuations over time, mainly due to speculative bubbles. – See CROCI, earnings, earnings taxation, price/cash flow ratio, high flyer, KCV, profitability, asset value investors. – Cf. Annual Report 2008 of the Deutsche Bundesbank, pp. 26 ff. (CROCI 2004-2008), Monthly Report of the Deutsche Bundesbank of July 2008, pp. 24 ff. (CROCI tends to equilibrium; overviews, references), Monthly Report of the Deutsche Bundesbank of July 2009, p. 25 (CROCI for Dax stocks since 1991), Monthly Report of the Deutsche Bundesbank of January 2010, pp. 20 f. (calculation problems).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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