Can you elaborate on the concept of Price/Earnings ratio as explained in The Intelligent Investor?

The method of calculating Price/Earnings ratio presented in The Intelligent Investor challenges existing practices by insisting on calculating the P/E ratio based on a multi-year average of past returns, rather than primarily on next year's earnings as is commonly done on Wall Street. This approach reduces the likelihood of overvaluing a company due to an unusually profitable year or high revenue projections. For example, if a company has earned $0.50 per share over six years but earned $3 over the last 12 months, using the traditional method, the stock would be valued at $75 at 25 times the P/E ratio. However, if valued at 25 times the average earnings over the past seven years, the stock would be valued at just $21.43.

The Price/Earnings (P/E) ratio is a financial metric used to evaluate the valuation of a company. It's calculated by dividing the market value per share by the earnings per share (EPS). In The Intelligent Investor, Graham suggests calculating the P/E ratio based on a multi-year average of past returns, rather than just the next year's projected earnings. This approach reduces the risk of overvaluing a company due to an unusually profitable year or optimistic revenue projections. For example, if a company has earned $0.50 per share over six years but earned $3 over the last 12 months, the P/E ratio based on the last year would value the stock at $75 (at 25 times the P/E ratio). However, if the P/E ratio is calculated based on the average earnings over the past seven years, the stock would be valued at just $21.43 (also at 25 times the P/E ratio). This method provides a more conservative and potentially more accurate valuation.