Previously, we explained that the P.E. Ratio is the Price to Earnings Ratio. You might hear many people use this term.
But hearing the term PE Ratio is not enough. You have to ask whether it is the Trailing PE or the Forward PE Ratio, or any other variant of the PE Ratio.
A. The Trailing PE Ratio:
The Trailing PE Ratio is the Trailing Price to Earnings Ratio.
TRAILING PE RATIO = Current Stock Price / Trailing Twelve Months Earnings Per Share (Abbreviated “ttm EPS”)
The Trailing Twelve Months Earnings Per Share is the Earnings over the last twelve months. This number has been publicly announced and is not a guess.
Today, Apple (AAPL) price = $116.41.
The TTM EPS is $9.13.
TRAILING PE (AAPL) = $116.41 / $9.13 = 12.75
B. Forward PE Ratio:
The Forward PE Ratio is the Forward Price to Earnings Ratio.
FORWARD PE RATIO = Current Stock Price / Estimated Earnings Per Share over next twelve months.
This estimated EPS over the next twelve months is estimated by different people. Since this is in the future, the estimates can change, and so the Forward PE Ratio can change. Optimistic analysts means that the EPS might be high, which means that the Forward PE Ratio may be smaller than expected. As EPS estimates are reduced (and if stock price remains stable), then the Forward PE Ratio increases.
Apple’s (AAPL) current price = $116.41
The Estimated EPS over next twelve months = $9.65.
FORWARD PE (AAPL)= $116.41 / $9.65 = 12.06
C. Which should we prefer? Forward PE or Trailing PE?
The Trailing PE shows us what happened in the past. What is important is the PE Ratio in the future, so the Forward PE should take precedence.
However, be aware that the Forward PE Ratio can change based on changing variables such as price, and Forward EPS estimates.