Trailing P/E vs Forward P/E: What’s the Difference

The price-to-earnings (P/E) ratio is one of the most widely used valuation metrics in stock analysis. It helps investors assess whether a stock is trading at a fair value compared to its earnings. Within this, two variations—trailing P/E and forward P/E—offer different perspectives. Understanding how these differ is essential for evaluating a company’s performance and potential growth.

The price-to-earnings (P/E) ratio measures how much investors are willing to pay for each unit of a company’s earnings. It is calculated by dividing the market price per share by the earnings per share (EPS).

A higher P/E suggests that the market has high expectations of future growth, while a lower P/E may indicate undervaluation or weaker growth prospects.

Trailing P/E refers to the price-to-earnings ratio based on a company’s actual earnings over the past 12 months. Since it uses historical data, it is considered an objective measure of performance.

This ratio reflects what investors are currently paying for past earnings, making it reliable but less forward-looking.

The formula for calculating trailing P/E is:

• Trailing P/E = Current Market Price per Share​ / EPS over the past 12 months

This shows how much investors are paying for each unit of a company’s historical earnings.

Forward P/E is calculated using forecasted earnings for the upcoming 12 months. Analysts estimate the company’s expected profits, and this projected EPS is used in the calculation.

Since it relies on predictions, it reflects market expectations but may vary depending on the accuracy of earnings forecasts.

The formula for forward P/E is:

• Forward P/E = Current Market Price per Share​ / Expected EPS over the next 12 months 

This shows how much investors are paying today for the company’s anticipated future earnings.

Suppose a company’s share price is ₹500.

• EPS for the last 12 months (actual) = ₹25
  

• Expected EPS for the next 12 months = ₹40
  

Trailing P/E = 500/25​ = 20

Forward P/E=500/40​ = 12.5

In this case, the forward P/E is lower, suggesting that earnings are expected to grow in the coming year.

Some of the benefits of trailing P/E include:

• Based on audited, actual financial data.
  

• Provides a consistent benchmark for historical comparison.
  

• Less influenced by analyst predictions or external estimates.
  

These factors make it a reliable tool for conservative investors.

Forward P/E offers the following advantages:

• Reflects future growth expectations.
  

• Helps investors gauge market optimism.
  

• Useful for comparing high-growth companies where past earnings may understate potential.
  

This is commonly referenced when analysing growth-oriented companies.

While useful, P/E ratios have certain limitations:

• They do not account for debt levels, cash flows, or industry differences.
  

• Forward P/E depends heavily on the accuracy of analyst forecasts.
  

• A low P/E may not always mean undervaluation—it could reflect underlying risks.
  

Thus, investors should use P/E ratios alongside other valuation tools.

Both trailing P/E and forward P/E are important valuation measures. Trailing P/E offers reliability through historical data, while forward P/E provides insight into future expectations. Both are often analysed together in combination to make informed decisions about a stock’s valuation.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.