Stock valuation ratios-1: Training P/E and Leading P/E
Earnins of companies are major driver of value of stock, thus earnings per share (EPS) is the main focus of analysts and investors.
There are two alternative definitions of P/E: trailing P/E and leading P/E.
- A stock’s trailing P/E (current P/E) is its current market price divided by the last four quarters’ EPS.
- The leading P/E (forward or prospective P/E) is a stock’s current price divided by the nex year’s expected earnings.
When someone tries to compare stocks, he/she should apply the same P/E definition to all companies. Otherwise the P/Es are not comparable. Also, negative P/Es are not meaningful.
Moreoever, companies listed in the stock exchanges should present both basic EPS and diluted EPS.
- Basic EPS reflects total earnings divided by the weighted-average number of shares actually outstanding during the period.
- Diluted EPS reflects division by the number of shares that would be outstanding if holders of securities such as executive stock options, equity warrants, and converitble bonds exercised their options to obtain common stock.