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Trailing Price-to-Earnings (P/E) and Forward Price-to-Earnings (P/E)

Updated: Apr 26

The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.


P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison to others in the same sector. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.


Trailing P/E

The trailing P/E relies on past performance by dividing the 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 the trailing P/E also has its share of shortcomings - namely, that a company’s past performance doesn’t signal future behavior.


Forward P/E

The forward (or leading) P/E uses future earnings guidance rather than trailing figures. Sometimes called "estimated price to earnings," this 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.


Source: Investopedia, P/E Ratio Definition: Price-to-Earnings Ratio Formula and Examples, accessed 24 December 2023, <https://www.investopedia.com/terms/p/price-earningsratio.asp>

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