Forward P/E vs. Trailing P/E: An Overview

If an investor is asked to identify the most popular stock market metric, other than price, price to earnings ratio (P/E) would most likely pass his lips. Not only is the P/E ratio the best-known indicatoꦅr of an equity’s true value, but it’s also remarkably easy to calculate.

To determine the P/E value, one simply must divide the current sto🧜ck price by the earnings per share (EPS). The current stock price (P) can be determined by plugging a stock’s ticker symbol into any financial news website. And although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.

EPS comes in two main varieties. The first is a metric listed in the fundamentals section of most finance sites; with the notation "P/E (ttm)," where “ttm” is a Wall Street acronym for “澳洲幸运5开奖号码历史查询:trailing 12 months.” This number signals the company's performance over the past 12 months. The second type of EPS is found in a company's earnings release, which often provides EPS guidance. This is the company's best-educated guess of what it expects to earn in the future. These two types of EPS metrics factor into the most common types of P/E ratios༺: forward P/E and trailing P/E.

Forward P/E

澳洲幸运5开奖号码历史查询:Forward P/E uses 澳洲幸运5开奖号码历史查询:future earnings guidance rather than trailing figures. Sometimes called "estimated price to earnings," this 澳洲幸运5开奖号码历史查询:forward-looking indicator is useful for comparing current earnings to future earnings and helps provide a clearer picture of what earnings will look like, without changes and other accounting adjustments. However, there are inherent problems with the forward P/E metric—namely, companies could underestimate earnings in order to beat the estimate P/E when the next quarter's earnings are announced. Other companies may overstate the estimate and later adjust it going into their next earnings announcement. Furthermore, external analysts may also pro🔯vide estimates, which may diverge from the company estimates, creating confusion.

If you're using forward P/E as a central basis of your investment thesis, research the companies thoroughly. If the company updates its guidance, this will affect the forward P/E in a way that might make you revise your opinion.

Trailing P/E

澳洲幸运5开奖号码历史查询:Trailing P/E relies on past performance by dividing the 澳洲幸运5开奖号码历史查询:current share price by the total EPS earnings over the past 12 months. It's the most popular P/E metric because it's the most objective, assuming the company reported earnings accurately. Some investors prefer to look at the trailing P/E because they don't trust another individual’s earnings estimates. But trailing P/E also has its share of shortcomings—namely, a company’s past performance doesn’t signal future behavior. Therefore, investors should commit money based on 澳洲幸运5开奖号码历史查询:future earnings power, not the past. The fact that the EPS number remains constant, while the stock prices fluc𒈔tuate, is also a problem. If a major company event drives the stock price significantly higher or lower, the trailing P/E will be less reflective of those 🍒changes.

The Bottom Line

Instead of selecting one P/E ratio, why not use both? Sometimes the trailing and forward P/E are similar. Other times they’re divergent. If they are different, conduct further research to determine why. If a company is rapidly growing, the forward P/E could be much higher than the trailing P/E. If it sells a piece of its business or undergoes a large scale restructuring, 澳洲幸运5开奖号码历史查询:forward earnings could temporarily nosedive.