SIG provides an advanced feature as an alternate view of your stock analysis. Normally, SIG calculated the normal Average High PE Ratio and Average Low PE Ratio in the Price and Earnings History table (located on SIG's Analysis Tab). These values are used for the Average PE Ratio and are used in the projected High Price and projected Low Price in the following analysis.
However, a regular average calculation may not always be the best way to analyze the High and Low PE Ratios. For example, a company with increasing growth rates will experience PE Ratio expansion, meaning more recent PE Ratios will be higher than earlier years. Likewise, a company with slowing growth rates will experience PE Ratio contraction. SIG offers an alternate calculation to examine these PE Ratios. To use the Weighted PE Ratios option, select the menu option in the Analysis Menu.
The Weighted Ratio Calculation
The weighted PE ration calculation places more emphasis on more recent years of data. This is done by multiplying the PE ratio for each year by 1, 2, 3, 4, and 5 as shown below:
Standard Average PE |
Weighted Average PE |
|||
Year 1 |
x 1 |
x 1 |
||
Year 2 |
x 1 |
x 2 |
||
Year 3 |
x 1 |
x 3 |
||
Year 4 |
x 1 |
x 4 |
||
Year 5 |
x 1 |
x 5 |
||
Total |
Ave = Total / 5 |
Ave = Total / 15 |
This give a weighting to the average ratios that are more influcenced by the most recent years versus five years ago.
When weighted PE Averages are selected from the Analysis menu, the averages will have a red (w) next to the calculation.
A good example of weighted PE averages is Home Depot (HD) that had high PE ratios of 33.72, 20.15, 19.6, 15.99, and 15.59 (for 2002 to 2006). Obviously Home Depot's PE ratio went from the highest of 33.72 and has declined each subsequent year.
Using a regular mathematical average results in an average
High PE of 21.01, but the weighted High PE is only 18.32 -- about 13% less.
Standard PE Averages
Weighted PE Averages