Savvy Trades and Investments

[michael t]

cliff re: index PEs

This is my understanding of the method by which they calculate an index PE ratio. The summation of the market caps of all the companies in the index divided by the summation of all the earnings of the companies in the index. (Note: These are gross amounts (not per share).)

For example, if you have an index of Company A and Company B

Company A market cap of 500m, trailing 12 months earnings of 50m. The company's PE equals 10.

Company B has a market cap of 50m and trailing 12 months earnings of .1m. The company's PE equals 500


Index PE (500m + 50m)/(50m + .1m) PE 10.97

If there was a third company in the index that loses money, then this is how wall street calculates the PE for the russell.

Company c has a market cap of 200m and trailing 12 months loss of -20m.

Index PE (500m + 50m + 200m)/(50m + .1m) PE 14.97


The number in the wsj calculates eps including losses.
Actual PE (500m + 50m + 200m)/(50m + .1m - 20m) PE 24.91