The Price To Earnings Ratio - Trailing PE vs Forward PE Ratios | Summary and Q&A

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November 18, 2019
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The Organic Chemistry Tutor
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The Price To Earnings Ratio - Trailing PE vs Forward PE Ratios

TL;DR

Learn how to calculate trailing P/E ratios based on earnings per share (EPS) over the past 12 months, and forward P/E ratios based on estimated EPS for the next 12 months.

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Questions & Answers

Q: How do you calculate the trailing P/E ratio?

The trailing P/E ratio is obtained by dividing the current stock price by the EPS value for the previous 12 months. It reflects the market's assessment of the company's recent performance and profitability.

Q: What is the formula for calculating the forward P/E ratio?

The forward P/E ratio is calculated by dividing the stock price by the estimated EPS value for the next 12 months. It helps investors gauge the market's valuation based on anticipated future earnings.

Q: What is the significance of the trailing P/E ratio?

The trailing P/E ratio provides insight into a company's historical valuation in relation to its earnings. A higher ratio suggests the stock is relatively expensive, while a lower ratio may indicate undervaluation.

Q: How is the forward P/E ratio useful for investors?

By using the forward P/E ratio, investors can analyze a company's potential growth and profitability. A lower forward P/E ratio compared to the trailing P/E ratio might indicate expected future improvement in earnings.

Summary & Key Takeaways

  • Trailing P/E ratio is calculated by dividing the current stock price by EPS value over the previous 12 months.

  • Forward P/E ratio is determined by dividing the stock price by the estimated EPS value for the next year.

  • Trailing P/E ratio represents the price-to-earnings ratio for the past 12 months, while forward P/E ratio provides a future-oriented price-to-earnings ratio.

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