I’m not sure where I got this info but I jotted down a quick note in my elan guide (and it wasnt from there, obviously) that if Earnings are expected to grow/ increasing, the leading P/E will be < than Trailing. Again not sure where I got this from but there was a question on the CFAI mock asking which PE is larger based on the figures given and I just guessed it based on the assumption above, without the calc and it was the correct answer Is this alway’s the case or was it a coincidence? Question # 88 CFAI Morning Session.
I think it is a coincidence that you got that question correct. If a company that is expected to experience negative earnings growth in the future, the trailing P/E will be lower than the leading P/E. This is because its present earnings are greater than its future earnings.
Just found where I got that statement from. Volume 5 CFAI book-bottom of pg 199. Does that make sense to you, esp with the answer on the mock exam?
I doubt if its a co-incidence. (unless i am missing something) Forward P/E ratio = Px Per Share / Earnings per share in next year If earnings are expected to rise & Px Per Share is constant, P/E Ratio will decrease, compared to current one… If Market Price - 10$ / share ; current earnings = 2$ / share ; expected earnings = 5$ / share Forward P/E = 2 ; Trailing P/E = 5. It’ll work other way round for negative earnings i guess.
You can do it from sense - P/E is multiple to apply to earnings to get todays price. If the earnings are higher the multiple is lower. Or you can do it from math: It comes from P0 = Div1/ (r - g) Div1 = payout rate x EPS1 so P0 = Payout x EPS1 / (r - g) Divide both sides by E1 and P0 / EPS1 = Payout / (r- g) This is a leading P/E multiple. P0/EPS0 = trailing P/E EPS0 x (1 = g) = E1 So P0/EPS1 (leading)= (P0/(EPS0x(1 + g)) Trailing P/E has a bigger bottom line (EPS0) than leading (EPS1 = EPS0(1 + g) so is a higher multiple There is more on http://www.studyinteractive.org/programmes/cfa/revision/