Trailing P/E vs. Forward P/E: Key Differences- Formula + Excel File

What is the P/E ratio?

The P/E ratio, or price-to-earnings ratio, is a financial metric used to assess the valuation of a company's stock. It is calculated by dividing the market price per share by the earnings per share (EPS). The P/E ratio provides investors with insights into how much they are willing to pay for each dollar of earnings generated by the company.

Investors often use the P/E ratio as a tool to compare the relative value of different stocks in the market. A higher P/E ratio suggests that investors have higher expectations for future earnings growth, while a lower P/E ratio may indicate that the market has lower expectations for the company's future prospects.

P rice-to-Earning (P/E) Ratio

Understanding trailing P/E ratio

The trailing P/E ratio, also known as the historical P/E ratio, is calculated using the company's past earnings. It is derived by dividing the current market price per share by the earnings per share over the past 12 months.

The trailing P/E ratio provides investors with a snapshot of the company's valuation based on its historical performance. It is often used as a benchmark to assess whether a stock is overvalued or undervalued relative to its earnings. However, it does not take into account future earnings potential or changes in the company's financial outlook.

Formula and Example of trailing P/E ratio

Trailing P/E = Current Share Price ÷ Historical EPS

Here is a step-by-step breakdown of the formula:

Current Share Price: The current market price of the company's shares.
Historical EPS: The earnings per share (EPS) for the previous 12 months, usually based on the company's most recent quarterly report (10-Q) or the latest fiscal year (10-K).

The trailing P/E ratio is calculated by dividing the current share price by the historical EPS. This metric provides a valuation multiple that indicates how much investors are willing to pay for a dollar of the company's current earnings.

For example, if a company's current share price is $50.00 and its historical EPS for the previous 12 months is $3.25, the trailing P/E ratio would be:

Trailing P/E = $50.00 ÷ $3.25 = 15.4xThis indicates that investors are willing to pay $15.40 for a dollar of the company's current earnings.

What Is Basic Earnings Per Share (EPS) ?

Advantages and disadvantages of trailing P/E ratio

Advantages of Trailing P/E Ratio

Provides a historical perspective on the company's valuation The trailing P/E ratio accounts for a company's actual earnings over the past 12 months, providing a historical perspective on the company's valuation

Easy to calculate and widely reported The trailing P/E ratio is widely used and reported by many financial websites and investment apps, making it easily accessible for investors.Useful for comparing the relative valuations of different companies in the same industry It allows for the comparison of different companies within the same industry, providing insights into their relative valuations

Disadvantages of Trailing P/E Ratio

Does not consider future earnings potential The biggest limitation of the trailing P/E ratio is that it doesn't take into account the company's growth prospects or future earnings potential

Does not reflect changes in the company's financial outlook Trailing P/E ratio fails to reflect changes in the company's financial outlook, as it is based on historical earnings

May not be applicable for companies with volatile earnings It may not be suitable for companies with volatile earnings, as it relies on past performance.

Can be influenced by one-time events or non-recurring income The trailing P/E ratio can be influenced by one-time events or non-recurring income, which may not reflect the company's true valuation.

Understanding forward P/E ratio

The forward P/E ratio, also known as the estimated P/E ratio, is calculated using the company's projected earnings. It is derived by dividing the current market price per share by the estimated earnings per share for the next 12 months.

The forward P/E ratio provides investors with a view of the company's valuation based on its expected future earnings. It takes into account analysts' forecasts and reflects the market's expectations for the company's financial performance. This ratio is often used to assess whether a stock is overvalued or undervalued based on future earnings potential.

Formula and Example of Forward P/E ratio

Forward P/E = Current Share Price ÷ Forecasted EPS

This formula divides a company's current share price by its estimated earnings per share (EPS) for the next fiscal year or a future period. The result is a valuation metric that indicates how much investors are willing to pay for a dollar of the company's future earnings.

Here is a step-by-step breakdown of the formula:

Current Share Price: The current market price of the company's shares.
Forecasted EPS: The estimated earnings per share for the next fiscal year or a future period, usually based on financial forecasts or analyst estimates.
Forward P/E Ratio: The result of dividing the current share price by the forecasted EPS, representing the multiple that investors are willing to pay for a dollar of the company's future earnings.

For example, if a company's current share price is $50 and its forecasted EPS for the next year is $2.60, the Forward P/E ratio would be:

Forward P/E = $50 ÷ $2.60 = 19.23This indicates that investors are willing to pay $19.23 for a dollar of the company's future earnings.

Advantages and disadvantages of forward P/E ratio

Advantages of Forward P/E Ratio

Considers future earnings potential and changes in the company's financial outlook The forward P/E ratio takes into account the company's expected future earnings, providing insight into the company's potential growth and financial outlook .

Reflects the market's expectations for the company's performance It reflects the market's expectations for the company's future performance, offering a glimpse into investor sentiment and expectations for the company's growth .

Useful for assessing the stock's valuation based on future earnings It is valuable for assessing a stock's valuation based on its anticipated future earnings, providing a forward-looking perspective on the company's worth .

Disadvantages of Forward P/E Ratio

Relies on analysts' forecasts, which may be inaccurate The forward P/E ratio is based on analysts' forecasts, which can be subject to inaccuracies and biases, potentially leading to misleading valuations .

Can be influenced by external factors and market sentiment External factors and market sentiment can influence the forward P/E ratio, potentially leading to fluctuations in the perceived valuation of the company .

May not reflect the company's actual future earnings There is a risk that the forward P/E ratio may not accurately reflect the company's actual future earnings, as it is based on forecasts that may not materialize as expected .

Subject to revision as new information becomes available The forward P/E ratio is subject to revision as new information becomes available, potentially leading to changes in the perceived valuation of the company based on updated forecasts .

Key differences between trailing P/E and forward P/E ratio in table form

Trailing P/E Ratio	Forward P/E Ratio
Based on historical earnings	Based on projected earnings
Provides a snapshot of the company's past valuation	Provides a view of the company's future valuation
Does not consider future earnings potential	Considers future earnings potential and changes in the financial outlook
Widely used for comparing relative valuations	Useful for assessing the stock's valuation based on future earnings

Trailing P/E and Forward P/E Excel Download

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