What is the difference between trailing and forward P/E?

Trailing P/E uses earnings from the past 12 months, while forward P/E uses estimated earnings for the next 12 months. Forward P/E is better for growing companies but relies on analyst estimates.

Why do some stocks have negative P/E ratios?

Negative P/E occurs when a company has negative earnings (losses). In this case, P/E ratio isn't meaningful, and investors should look at other metrics like Price-to-Sales or Price-to-Book.

P/E Ratio: the most popular valuation metric

Price-to-Earnings (P/E) ratio is the most widely used stock valuation metric. It tells you how much investors are willing to pay for each dollar of earnings.

The Formula

P/E Ratio = Stock Price ÷ Earnings Per Share (EPS)

Example: A stock trading at $100 with EPS of $5 has a P/E of 20x.

Trailing vs Forward P/E

Trailing P/E (TTM): Uses actual earnings from the past 12 months. More reliable but backward-looking.
Forward P/E: Uses estimated future earnings. Better for growth stocks but depends on analyst accuracy.

What is a "Good" P/E Ratio?

Low P/E (<15)

Potentially undervalued or slow growth

Average P/E (15-25)

Fairly valued for most stocks

High P/E (25-40)

Growth expectations priced in

Very High P/E (>40)

High growth required to justify

Always compare P/E to industry peers and historical averages.

Limitations of P/E

Doesn't work for unprofitable companies
Earnings can be manipulated through accounting
Ignores debt levels and cash on balance sheet
Doesn't account for growth rate (use PEG ratio instead)

FAQs

What is a good P/E ratio?

It depends on the industry. Generally, P/E under 15 is cheap, 15-25 is fair, above 25 is expensive.

Why do some stocks have negative P/E?

Negative P/E means the company has losses. Look at Price-to-Sales or Price-to-Book instead.

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Intrinsic Investor is for educational purposes only. Not financial advice.