What is 'Trailing Price-To-Earnings - Trailing P/E'

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 Ratio = Current Share Price / Trailing 12-Month EPS

BREAKING DOWN 'Trailing Price-To-Earnings - Trailing P/E'

The price-earnings ratio, or P/E ratio, is calculated by dividing a company's stock price by its earnings from the most recent fiscal year. The earnings for the most recent fiscal year can be found on the income statement in the annual report. At the bottom of the income statement is a total EPS for the firm's entire fiscal year. Divide the company's current stock price by this number to get the traditional P/E ratio. For example, a company with a stock price of $50 and EPS of $2 has a P/E ratio of 25x, read 25 times. This means that the company's stock is trading at 25x its EPS.

Why Do Analysts Use P/E

Analysts like the P/E ratio because it places a relative price tag on earnings. This relative price tag can be used to look for bargains or to determine when a stock is too expensive. Some companies deserve a higher price tag because they've been around longer and have deeper economic moats, but some companies are simply overpriced. Likewise, some firms deserve a lower price tag because they have an unproven track record, while others are underpriced, representing a great bargain. Trailing P/E helps analysts match time periods for a more accurate and up-to-date measure of relative value.

Trailing Price-To-Earnings

A disadvantage of the P/E ratio is that stock prices are constantly moving, while earnings remain fixed. Analysts attempt to deal with this issue by using the trailing price-to-earnings ratio, which uses earnings from the most recent four quarters rather than earnings from the end of the last fiscal year.

Using the same example presented above, if the company's stock price falls to $40 midway through the year, the new P/E ratio is 20x, which means the stock's price is now trading at only 20x its earnings. Earnings have not changed, but the stock's price dropped. Earnings for the last two quarters may have also dropped. In this case, analysts can substitute the first two quarters of the fiscal year calculation with the most recent two quarters for a trailing P/E ratio. If earnings in the first half of the year, represented by the most recent two quarters, are trending lower, the P/E ratio will be higher than 20x. This tells analysts that the stock may actually be overvalued at the current price given its declining level of earnings.

The trailing P/E ratio differs from the forward P/E, which uses earnings estimates for the next four quarters or next projected 12 months of earnings. As a result, forward P/E can sometimes be more relevant to investors when evaluating a company.

RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. P/E 10 Ratio

    The P/E 10 ratio is a valuation measure, generally applied to ...
  3. Trailing EPS

    Trailing earnings per share (EPS) is the sum of a company's earnings ...
  4. Rule Of 18

    Rule of 18 allegedly foretells if stocks will rise or fall based ...
  5. Trailing

    Trailing is used to describe a past statistic, such as same-store ...
  6. Franchise P/E

    Franchise P/E, the present value of new business opportunities ...
Related Articles
  1. Investing

    Comparing the P/E, EPS And Earnings Yield

    Here are three ratios that help investors value stock returns.
  2. Investing

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  3. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
  4. Investing

    The Average Price-Earnings Ratio in the Retail Sector

    Find out about the retail sector's average price-earnings ratio, or P/E ratio, and average P/E for companies in the seven different categories of retail.
  5. Investing

    The 4 basic elements of stock value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
RELATED FAQS
  1. What is the difference between forward p/e and trailing p/e?

    Understand the difference between the trailing P/E ratio, which is the standard price-to-earnings calculation, and the forward ... Read Answer >>
  2. Can stocks have a negative price-to-earnings ratio?

    A stock can have a negative price-to-earnings ratio (P/E). A negative P/E ratio means the company has negative earnings or ... Read Answer >>
  3. How do I calculate the P/E ratio of a company?

    The P/E ratio shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares ... Read Answer >>
  4. What is the average price-to-earnings ratio in the telecommunications sector?

    Discover the average trailing and forward price-to-earnings ratios for the telecommunications sector and the usefulness of ... Read Answer >>
  5. How do companies benefit from price discrimination?

    Learn what the average price-to-earnings ratio is for the insurance sector and why the average price-to-earnings ratio should ... Read Answer >>
  6. What is the average price-to-earnings ratio in the automotive sector?

    Learn the average price-to-earnings ratio for the automotive sector and how it is used to evaluate a company’s potential ... Read Answer >>
Trading Center