Differences between Trailing PE vs Forward PE Ratio
There are two types of Price Earning Ratio – Trailing PE and Forward PE Ratio.
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
Let us calculate Trailing PE Ratio of Amazon.
Amazon Current Share Price = 1,586.51 (as of 20th March, 2018)
source: reuters.com
- Earnings Per Share (TTM) of Amazon = EPS (Dec,2017) + EPS (Sep 2017) + EPS (June 2017) + EPS (March, 2017) = 2.153 + 0.518 + 0.400 + 1.505 = $4.576
- PE (TTM) = Current Price / EPS (TTM) = 1586.51 / 4.576 = 346.7x
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What is Forward PE Ratio
Let us now look at what Forward PE Ratio Formula is –
Forward PE Ratio Formula = Price Per Share / Forecasted EPS over the next 12 months
Forward PE Ratio Example
Amazon Current Share Price = 1,586.51 (as of 20th March, 2018)
Forward EPS (2018) of Amazon = $8.31
Forward EPS (2019) of Amazon = $15.39
- Forward PE Ratio (2018) = Current Price / EPS (2018) = 1,586.51/8.31 = 190.91x
- Forward PE Ratio (2019) = Current Price / EPS (2019) = 1,586.51/15.39 = 103.08x
Trailing PE vs Forward PE Ratio
As you can note from above, the key difference between the two 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 use the Historical EPS, while Forward PE Ratio uses the Forecast EPS. Let us look at the below another example to calculate the Trailing PE vs Forward 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 of the things to consider regarding the Trailing Price Earning Ratio vs Forward Price Earning Ratio.
- If EPS is expected to grow then 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 EPS is expected to decrease, then you will note that the Forward PE Ratio will be higher than the Trailing PE Ratio. This 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 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 outstanding at a market price of $20/share. Calculate Rudy’s trailing and leading P/E ratio. If the 5 years historical average Price Earning Ratio is 15x, whether Rudy Comp is overvalued or undervalued?
Answer – Please drop your answers in the comment box.
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This 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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