Differences between Trailing PE vs. Forward PE Ratio

Trailing PE uses earnings per share of the company over the previous 12 months for calculating the price-earnings ratio. In contrast, Forward PE uses the forecasted earnings per share of the company over the next 12 months for calculating theThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more price-earnings ratioPrice-earnings RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more.

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What is Trailing PE Ratio

Trailing PE Ratio is where we use the Historical Earning Per share in the denominator.

Trailing PE Ratio Formula (TTM or Trailing Twelve Months) = Price Per Share / EPS over the previous 12 months.

Trailing PE Ratio Example

source: reuters.com

What is Forward PE Ratio

Let us now look at how to calculate Forward PECalculate Forward PEForward PE ratio uses the forecasted earnings per share of the company over the next 12 months for calculating the price-earnings ratio. Forward PE ratio formula = Price per share/Projected earnings per share read more Ratio using Formula –

Forward PE Ratio Formula = Price Per Share / Forecasted EPS over the next 12 months

Forward PE Ratio Example

  • Forward PE Ratio (2018) = Current Price / EPS (2018) = 1,586.51/8.31 = 190.91xForward PE Ratio (2019) = Current Price / EPS (2019) = 1,586.51/15.39 = 103.08x

Trailing PE vs Forward PE Ratio

As you can note above, the key difference is the EPS used. For Trailing PE, we use the historical EPS, whereas, for Forward PE, we use EPS forecasts.

Trailing PE vs. Forward PE Ratio Example

Trailing PE Ratio uses the Historical EPS, while Forward PE Ratio uses the Forecast EPS. Let us look at the below example to calculate the Trailing PE vs. forwarding PE Ratio.

Company AAA, Trailing Twelve Months EPS is $10.0, and its Current Market Price is $234.

  • Trailing Price Earning Ratio formula = $234 / $10 = $23.4x

Likewise, let us calculate the Forward Price Earning Ratio of Company AAA. Company AAA 2016 estimated EPS is $11.0, and its current price is $234.

  • Forward Price Earning Ratio formula = $234 / $11 = $21.3x

Trailing PE vs Forward PE Ratio (Important points to note)

Some things to consider regarding the Trailing Price Earning Ratio vs. Forward Price Earning Ratio.

  • If EPS is expected to grow, the Forward PE Ratio will be lower than the Historical or Trailing PE. From the above table, AAA and BBB show an increase in EPS, and hence, their Forward PE Ratio is lower than the Trailing PE Ratio.On the other hand, if EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read moreis expected to decrease, you will note that the Forward PE Ratio will be higher than the Trailing PE Ratio. It can be observed in Company DDD, whose Trailing PE Ratio was at 23.0x; however, Forward PE Ratio increased to 28.7x and 38.3x in 2016 and 2017, respectively, Please note that the Forward PE Ratio only factors forecast EPS (2016E, 2017E, and so on), whereas the stock price will reflect earnings growth prospects far into the future. One should not only compare the Trailing PE Ratio for valuation comparison between the two companies but also look at the Forward PE Ratio to focus on Relative Value – whether the PE differences reflect the company’s long-term growth prospects and financial stability.

Trailing and Forward Price Earning Ratio – Quick Question

Rudy Comp reported $32million in earnings during FY2015. An analyst forecasts an EPS over the next twelve months of $1.2. Rudy has 25 million shares outstandingShares OutstandingOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more at a $20/share market price. Calculate Rudy’s trailing and leading P/E ratio. If the five-year historical average Price Earning Ratio is 15x, is Rudy Comp overvalued or undervalued?

Answer – Please drop your answers in the comment box.

Trailing PE vs. Forward PE Ratio Video

This article has been a guide to key differences between Trailing PE vs. Forward PE Ratios. Here we also take practical examples of calculating trailing PE and forward PEs and important notes to consider when using these in equity valuation.

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