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Trailing P/E vs forward P/E

Trailing P/E divides price by reported earnings. Forward P/E divides the same price by estimated earnings for the year ahead. A $50 share is a P/E of 20 on $2.50 of trailing earnings and a P/E of 10 on $5.00 of forward earnings. The share did not get cheaper.

 Trailing P/EForward P/E
DenominatorReported EPS, last twelve months.Estimated EPS, next year.
Teaching sheetA $50 share on $2.50 of earnings is 20 times. Market cap $5,000,000,000.The same $50 share on $5.00 of estimated earnings is 10 times. Market cap still $5,000,000,000.
What movedNothing about the price. The 20 is a reading of last year's profit.The denominator. The 10 is a reading of a year that has not happened.
When they matchWhen next year's earnings are expected to equal last year's.Same case. Growth or a slump is what splits them.
What it is askingWhat buyers are paying for profit that was actually earned.What buyers are paying for profit the street expects.
Where it misleadsA cyclical peak: a low trailing P/E on earnings that will not repeat.An estimate that gets revised. The ratio moves with the forecast, not with the price.
On this page

Same price, different year of profit

P/E is price over earnings per share. The formula does not know which year's earnings you meant.

On a $50 share with $2.50 of reported earnings and 100,000,000 shares, trailing P/E is 20. Market cap is $5,000,000,000. Total earnings are $250,000,000. Hold the price and put $5.00 of estimated earnings in the denominator and the ratio falls to 10. Market cap is still $5,000,000,000. Total estimated earnings are $500,000,000. The share did not get cheaper. The year in the denominator changed.

Mixing trailing and forward in a table is how a cheap-looking name appears next to an expensive-looking one that is actually the same firm on two different denominators.

How the price to earnings ratio works is the long form, with the price to earnings calculator under the answer. Type the EPS your sheet is using. The price to earnings ratio definition is the one-sentence version.

When the ratio stops

When earnings are zero or negative the ratio stops working. Dividing by a loss does not produce a useful multiple. Loss-making firms get compared on revenue, or on a different multiple, not here.

A lower P/E is not always a cheaper share, and a higher one is not always a bubble. The third sheet on the calculator, an $80 share on $2.50 of earnings with 50,000,000 shares, is a P/E of 32 on a $4,000,000,000 firm. That is a different object from the first sheet, trailing or forward. This is educational material, not financial advice.

Worked examples

A \$50 share on \$2.50 of earnings

The share price is $50, EPS is $2.50, and 100,000,000 shares are outstanding. What is P/E, and what is market cap?

  1. P/E is price over EPS: 50/2.50=2050 / 2.50 = 20.
  2. Market cap: 50×100000000=500000000050 \times 100000000 = 5000000000, so $5,000,000,000.
  3. Total earnings: 2.50×100000000=2500000002.50 \times 100000000 = 250000000, so $250,000,000.
  4. The same P/E from the totals: 5000000000/250000000=205000000000 / 250000000 = 20.

P/E is 20. Market cap is $5,000,000,000. Total earnings are $250,000,000.

The same price on \$5.00 of earnings

Keep the $50 price and 100,000,000 shares. EPS is now $5.00. What is P/E?

  1. P/E: 50/5=1050 / 5 = 10.
  2. Market cap is still $5,000,000,000.
  3. Total earnings: 5×100000000=5000000005 \times 100000000 = 500000000, so $500,000,000.

P/E falls to 10. Market cap is still $5,000,000,000. Earnings are $500,000,000.

An \$80 share on a smaller count

Price is $80, EPS is $2.50, shares outstanding 50,000,000. What is P/E?

  1. P/E: 80/2.50=3280 / 2.50 = 32.
  2. Market cap: 80×50000000=400000000080 \times 50000000 = 4000000000, so $4,000,000,000.
  3. Total earnings: 2.50×50000000=1250000002.50 \times 50000000 = 125000000, so $125,000,000.

P/E is 32. Market cap is $4,000,000,000. Earnings are $125,000,000.

Common questions

Which P/E should I use?

The one that matches the earnings in your sentence. Trailing for profit that was reported. Forward for profit that is estimated. Mixing them in a ranking is how two readings of one firm look like two firms.

Why does forward P/E move when the share price does not?

Because the denominator is an estimate. When analysts cut next year's earnings, forward P/E rises with no trade in the share. Trailing P/E stays put until the reported year turns over.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.