The Road to Successful Trading

Price-Earnings ratio (P/E) 
The market price of stock shares of a public company corporation is compared with its basic EPS 
and expressed in the price/earnings ratio (P/E) as follows:
Current Market Price of Stock Shares / Basic Earnings per Share = Price/Earnings Ratio
How to estimate the future value of stock shares using P/E Multiple 
A P/E multiple can be used to forecast a future value of a stock. Let’s say a company has a current 
stock price of $30 and earned $2 per share. If an analyst comes out with a forecast for next year for 
earnings of $4 per share, we can use the current P/E ratio of 15 and forecast a future stock price of 
$60 ($4 per share estimated earnings x 15 P/E ratio). 
 
 
How to Design and Construct An Effective Trading Plan 
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Return on Investment (ROI) or Return on Equity (ROE) 
Owners take the risk of whether their business can earn a profit and sustain its profit performance 
over the years. How much would you pay for a business that consistently suffers a loss? The value 
of the owners’ investment depends first and foremost on the past and future profit performance of 
the business relative to the capital invested to earn that profit.
For instance, suppose a business earns $100,000 annual net income for its stockholders. If its 
stockholders’ equity is only $250,000, then its profit performance relative to the stockholders’ 
capital used to make that profit is 40%, which is very good indeed. If, on the other hand, 
stockholders’ equity is 10 times as much ($2,500,000) then the company’s profit performance is 
4%, which is terrible relative to the owners’ capital tied up in the business to earn that profit. It 
would be better to purchase government bonds with no risk! 
The point is that profit should be compared with the amount of capital invested to earn that profit. 
Profit for a period divided by the amount of capital invested to earn that profit is called return