Trailing P/E

Definition

The trailing price-to-earnings (P/E) ratio is a valuation metric that measures a company's current stock price relative to its actual earnings per share (EPS) over the past 12 months. It provides a snapshot of a company's current valuation based on its recent financial performance.

5 Must Know Facts For Your Next Test

1. The trailing P/E ratio is calculated by dividing a company's current stock price by its actual earnings per share (EPS) over the past 12 months.
2. Trailing P/E is a backward-looking metric that provides a historical perspective on a company's valuation based on its recent financial performance.
3. Investors can use the trailing P/E ratio to compare a company's current valuation to its past performance or to the valuation of its peers within the same industry.
4. A low trailing P/E ratio may indicate that a stock is undervalued, while a high trailing P/E ratio may suggest that a stock is overvalued.
5. Trailing P/E is one of the most commonly used valuation metrics, as it provides a straightforward and easily accessible way to assess a company's current valuation.

Review Questions

• Explain how the trailing P/E ratio is calculated and what it represents.
  • The trailing P/E ratio is calculated by dividing a company's current stock price by its actual earnings per share (EPS) over the past 12 months. This ratio provides a snapshot of the company's current valuation based on its recent financial performance. A low trailing P/E ratio may indicate that the stock is undervalued, while a high trailing P/E ratio may suggest that the stock is overvalued.
• Discuss the differences between the trailing P/E and the forward P/E ratios, and explain which one may be more useful in different situations.
  • The key difference between the trailing P/E and the forward P/E ratios is the time frame they consider. The trailing P/E uses a company's actual past 12-month earnings, while the forward P/E uses projected future earnings. The trailing P/E provides a historical perspective on a company's valuation, while the forward P/E offers a forward-looking view. The trailing P/E may be more useful for assessing a company's past performance and current valuation, while the forward P/E can be more helpful in evaluating a company's future growth potential.
• Analyze how the trailing P/E ratio can be used in the context of 11.1 Multiple Approaches to Stock Valuation, and explain its role in evaluating a company's intrinsic value.
  • The trailing P/E ratio is a key metric in the multiple approaches to stock valuation discussed in Section 11.1. It can be used to assess a company's current valuation relative to its past financial performance, which is an important factor in determining the company's intrinsic value. By comparing a company's trailing P/E to its industry peers or to its own historical P/E ratios, investors can gain insights into whether the stock is undervalued, overvalued, or fairly valued. The trailing P/E ratio, along with other valuation metrics, can help investors make more informed decisions about a company's intrinsic worth and its potential for future growth and profitability.

Related terms

Forward P/E: The forward price-to-earnings (P/E) ratio is a valuation metric that measures a company's current stock price relative to its projected earnings per share (EPS) for the upcoming 12 months.

Earnings per Share (EPS): Earnings per share (EPS) is a financial ratio that measures a company's net income divided by the number of outstanding shares, providing insight into a company's profitability and potential for growth.

Valuation Multiples: Valuation multiples are financial ratios that compare a company's stock price to various financial metrics, such as earnings, cash flow, or book value, to determine if a stock is undervalued or overvalued.