Imagine this not-so-unusual scenario: A company with a price-to-earnings (P/E) ratio of 77 also has a projected P/E of 22. How is it expected to change so quickly? Let's see.

Envision the Three-Legged Chair Company (ticker: OOOPS). If its stock currently trades at $77 per share and has $1 per share in annual earnings, its P/E is 77. Let's say it's growing rapidly, though, and is expected to earn $3.50 next year. If so, the projected P/E for that year is 22 ($77 divided by $3.50 is 22).

With a firm that's growing briskly, if the earnings grow more quickly than the stock price, the P/E ratio for future years will decrease noticeably.

To see this phenomenon in action with an actual company, take a gander at some data for online marketplace eBay (NASDAQ:EBAY) below (data as of January 2005):

  • Current stock price: $111
  • Current year's estimated earnings per share (EPS): $1.22
  • P/E ratio on current year EPS: 91.2
  • Next fiscal year's estimated EPS: $1.60
  • P/E ratio on next fiscal year's EPS: 69.6

You can get information such as this from the Fool's Quotes & Research area. Select the "Estimates" option after typing in a company's ticker symbol.

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