Trailing p/e
A multiple using the last twelve months of reported earnings. Factual, but backward-looking and distorted by any one-off item in that year.
Where you will meet it
Trailing p/e appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Work out the price-to-earnings ratio and explain what it means
“Trailing P/E uses reported earnings and is factual but backward-looking; forward P/E uses a forecast and is relevant but only as good as the forecast.”
- Derive justified leading and trailing P/Es from the Gordon growth model and explain what they mean
“On current earnings the trailing multiple is higher by exactly 1 + g, because E0 is smaller than E1: P/E = P0 ÷ E0 = payout × (1 + g) ÷ (r − g).”
- Set out how valuation multiples change over the business cycle
“Near the bottom of a cycle earnings are depressed but prices already anticipate recovery, so trailing P/Es look high; near the peak earnings are unusually strong and trailing multiples look low even when prices are stretched.”
- Choose comparable peers and tell trailing multiples apart from forward ones
“Trailing multiples use the last reported twelve months and are factual but can include one-off items.”
Practise it
Practise trailing p/e until it is automatic: questions that explain every wrong option.
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