Trailing Price-To-Earnings
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: Trailing P/E is a relative valuation method based on the actual earnings of the past 12 months. It is calculated by dividing the current stock price by the earnings per share (EPS) of the past 12 months. Trailing P/E contrasts with forward P/E, which uses expected future earnings to calculate the P/E ratio.
Origin: The concept of P/E ratio dates back to the early 20th century. As the stock market developed, investors began using the P/E ratio to evaluate stock value. Trailing P/E, as a variant of the P/E ratio, focuses on past actual earnings, providing a valuation method based on historical data.
Categories and Characteristics: Trailing P/E has the following characteristics:
- Based on historical data: Trailing P/E uses the actual earnings of the past 12 months, providing a valuation based on historical performance.
- Easy to calculate: Since the data already exists, calculating trailing P/E is relatively simple.
- Reflects current market sentiment: Trailing P/E can reflect the market's view of the company's past performance.
Specific Cases:
- Case 1: Suppose a company's current stock price is $100, and the EPS for the past 12 months is $5. The company's trailing P/E would be 100 / 5 = 20. This means investors are willing to pay $20 for every $1 of past earnings.
- Case 2: Another company's current stock price is $50, and the EPS for the past 12 months is $2. Its trailing P/E would be 50 / 2 = 25. Although this company's stock price is lower, its trailing P/E is higher, indicating a higher market recognition of its past earnings.
Common Questions:
- Can trailing P/E predict future performance? Trailing P/E is based on historical data and cannot directly predict future performance, but it can serve as a reference for evaluating a company's past performance.
- Does a high trailing P/E mean the stock is expensive? A high trailing P/E may indicate that the stock is overvalued, but it could also reflect the market's expectations for the company's future growth.
