What is Trailing Price-To-Earnings ?
299 reads · Last updated: December 5, 2024
Trailing price-to-earnings (P/E) is a relative valuation multiple that is based on the last 12 months of actual earnings. It is calculated by taking the current stock price and dividing it by the trailing earnings per share (EPS) for the past 12 months.Trailing P/E can be contrasted with the forward P/E, which instead uses projected future earnings to calculate the price-to-earnings ratio.
Definition
The Trailing P/E Ratio is a relative valuation method based on actual earnings from the past 12 months. It is calculated by dividing the current stock price by the earnings per share (EPS) over the past 12 months. The Trailing P/E is contrasted with the Forward P/E, which uses expected future earnings to calculate the P/E ratio.
Origin
The concept of the P/E ratio originated in the early 20th century as stock markets developed, providing investors with a simple way to assess the value of stocks. The Trailing P/E, as a measure of historical earnings, helps investors understand a company's past profitability.
Categories and Features
The Trailing P/E is primarily used to evaluate the relationship between a company's current market value and its past earnings performance. Its feature is that it is based on realized earnings, making it relatively stable, but it may not reflect future earning potential. In contrast, the Forward P/E is based on future earnings forecasts, which can be more forward-looking but also more uncertain.
Case Studies
For example, consider Apple Inc., with a current stock price of $150 and an EPS of $5 over the past 12 months, resulting in a Trailing P/E of 30. This indicates that investors are willing to pay $30 for every $1 of past earnings. Another example is Coca-Cola, with a stock price of $60 and an EPS of $2 over the past 12 months, also resulting in a Trailing P/E of 30, showing a similar market pricing strategy.
Common Issues
Common issues investors face when using the Trailing P/E include its inability to predict future earnings, making it potentially inaccurate in rapidly changing markets. Additionally, the Trailing P/E can be distorted by one-time earnings or losses, requiring careful analysis by investors.
