What is Trailing P/E?
Trailing P/E is a financial ratio used to evaluate a company’s current stock price relative to its earnings per share (EPS) over the last 12 months. To calculate the Trailing P/E, you divide the current stock price by the earnings per share (EPS) over the last 12 months.
For example, if a company has a current stock price of $80 per share and an EPS of $8 per share over the previous twelve months, then its Trailing P/E would be 10 (i.e., 50/5 = 10).
Trailing P/E is a widely used valuation metric in the financial industry as it provides a quick way to compare the relative value of different companies within the same industry or sector. The Trailing P/E is a common method used to calculate the P/E ratio that is taught in finance and accounting courses.
In addition, many financial websites and databases provide Trailing P/E ratios for publicly traded companies as it is considered an important measure of a company’s valuation.
However, the trailing P/E is a backward-looking measure and does not take into account any future growth or earnings potential of the company. It’s also important to compare a company’s trailing P/E to its peers to get a better understanding of its relative valuation.
The Trailing P/E is also known as the trailing twelve months (TTM).
The Trailing P/E Ratio Calculation
The Trailing P/E ratio can be calculated by dividing the current stock price by the earnings per share (EPS) of the last 12 months.
- P is the current stock price of the company
- E is the earnings per share (EPS) of the last 12 months
Trailing P/E = Current Stock Price / Earnings Per Share (EPS)
For example, let’s say the current stock price of Feriors inc. is $80 per share, and its EPS over the previous twelve months is $8 per share. The Trailing P/E ratio for Feriors inc. would be:
Trailing P/E = $80 / $8 = 10
This means that investors are willing to pay $10 for every $1 of earnings that Feriors inc. generated over the last 12 months. The Trailing P/E ratio can be compared with other companies within the same industry or sector to determine relative valuation.
The Meaning of Trailing P/E
A high trailing P/E ratio means that the stock price is high relative to its earnings, which could indicate that the market is expecting high future earnings growth.
In contrast, a low trailing P/E ratio could indicate that the stock is undervalued or that the market is not optimistic about the company’s future earnings prospects.
It is important to note that the trailing P/E ratio is a backward-looking metric, as it only considers earnings from the past 12 months and does not take into account any future earnings projections. As a result, it may not always provide an accurate reflection of a company’s true value, particularly for companies in rapidly growing industries or companies with volatile earnings.
