Forward Price To Earnings Vs Trailing Price To Earnings

Forward price-to-earnings

These two types of EPS include the most common types of matrix factor P / E ratios: forward P / E and trailing P / E.

A third and less general variation uses the sum of the previous two real quarters and the estimate for the next two quarters.

The forward (or leading) P / E uses future earnings guidance rather than trailing figures.

Sometimes called "estimated value for earnings", it is useful to compare current income to future income.

This helps provide a clear picture of earnings without changes and other accounting adjustments.

However, there are further inherent problems with P / E - namely,

Companies may beat projections P / E when the next quarter earnings are announced. Other companies may outperform the estimate and adjust it later in their next income announcement.

In addition, external analysts may also provide estimates that may differ from company estimates, creating confusion.

Trailing price-to-earnings

The tracing P / E depends on past performance by dividing the current share price by total EPS earnings over the past 12 months.

It is the most popular P / E matriculation because it is the most objective - the company accurately reported income.

Some investors prefer to look at the trailing P / E as they do not rely on another person's earnings estimates. But the trailing P / E also has its drawbacks - that is, the company's past performance does not indicate future behavior.

Thus investors should earn money based on future earning power, not in the past. The fact that the EPS number remains constant while fluctuating stock prices is also a problem.

If the share price increases or decreases significantly in the event of a major company, the subsequent P / E will be less reflective of those changes.

The trailing P / E ratio will change as the price of a company's stock moves, since earnings are only released each quarter, while stocks trade day in and day out.

As a result, some investors prefer forward P / E if the forward P / E ratio is lower than the trailing P / E ratio, which means that analysts expect earnings to rise; If further P / E exceeds the current P / E ratio, analysts expect a decrease in earnings.