What is Trailing P/E Ratio?
The Trailing P/E Ratio is calculated by dividing a company’s current share price by its most recent reported earnings per share (EPS), i.e. the latest fiscal year EPS or the last twelve months (LTM) EPS.
How to Calculate Trailing P/E Ratio (Step-by-Step)
The trailing price-to-earnings ratio is based on a company’s historical earnings per share (EPS) as reported in the latest period and is the most common variation of the P/E ratio.
If equity analysts are discussing the price-to-earnings ratio, it would be reasonable to assume that they are referring to the trailing price-to-earnings ratio.
The trailing P/E metric compares a company’s price as of the latest closing date to its most recently reported earnings per share (EPS).
The question answered by the trailing price-to-earnings is:
- “How much is the market willing to pay today for a dollar of a company’s current earnings?”
In general, the historical valuation ratios tend to be most practical for mature companies exhibiting low-single-digit growth.
Learn More → Valuation Multiple
Trailing P/E Ratio Formula
Calculating the trailing P/E ratio involves dividing a company’s current share price by its historical earnings per share (EPS).
Where:
- Current Share Price: The current share price is the closing share price as of the latest trading date.
- Historical EPS: The historical EPS is the EPS value as announced in the latest fiscal year (10-K) or the latest LTM period based on the company’s most recent quarterly report (10-Q).
Trailing P/E Ratio vs. Forward P/E Ratio
The main benefit of using a trailing P/E ratio is that unlike the forward P/E ratio – which relies on forward-looking earnings estimates – the trailing variation is based on historical reported data from the company.
While there can be adjustments made that can cause the trailing P/E to differ between different equity analysts, the variance is much less than that of the forward-looking earnings estimates across different equity analysts.
Trailing P/E ratios are based on the reported financial statements of a company (“backward-looking”), not the subjective opinions of the market, which is prone to bias (“forward-looking”).
But sometimes, a forward P/E ratio can be more practical if a company’s future earnings reflect its true financial performance more accurately. For instance, a high-growth company’s profitability could change significantly in the upcoming periods, despite perhaps showing low-profit margins in current periods.
Unprofitable companies are unable to use the trailing P/E ratio because a negative ratio causes it to be meaningless. In such cases, the only option would be to use a forward multiple.
One drawback to trailing P/E ratios is that the financials of a company can be skewed by non-recurring items. In contrast, a forward P/E ratio would be adjusted to portray the normalized operating performance of the company.
