Derivatives are Financial Weapons of Mass Destruction Difference in Forex Markets and Equity Markets in Technical Analysis

Determining Returns on Stocks

Once you have determined an appropriate P/E ratio, you can multiply that ratio by a stock's past 12-month earnings to determine a rational current share price. You can then project future share prices based on the expected growth rate of earnings. In other words, with an assumed constant P/E ratio going forward, the share price will advance at the rate of earnings growth. The market will have set a current price for the stock that will typically be different from the current value you have assigned. Using a simple "present-value/future-value" calculator, you can easily determine the average annual return prospects of the stock from the current market price to one of your projected future prices - preferably the one that is four to five years out. Any stock, even a steady growth stock, may be overvalued by the market at any given point in time and thus not suitable as an investment. If the average annual return prospects at the current quotation are less then 10%, you probably want to look elsewhere.