justified p/e vs. leading p/e

CFA Level II
#1

what is the differencee? according to stalla, they are both calculated the same way. P0/E1 = DP/Ke - G

#2

A leading P/E is a justified P/E Justified P/Es are based on a firm’s fundamentals. There are two types of justified P/E - Leading and Trailing. Leading is based on the earnings forecast for the next period and trailing is based on the earnings forecast for the previous period Hope that helps

#3

Justified…is implying what the P/E SHOULD be ( whether trailing or leading ), based on assumed cost of capital, expected growth, and payout ratios…

#4

trailing P/e0 = (1-b)(1+g)/r-g leading P/e1 = (1-b)/r-g

#5

I’m still confused about why the leading P/E does not consider (1+g) for future growth. Isn’t the leading P/E based on expected earnings? Anyone care to explain, please.

#6

Red, since P = D0*(1+g)/(r-g) = D1/(r-g) divide both parts by E1 -> P/E1 = PR/(r-g) = leading P/E

#7

So basically the payout ratio for the leading P/E is the expected payout ratio and the trailing P/E uses the current payout ratio. Now it makes sense. Thanks!

#8

Not quite. P/E0 = PR*(1+g)/(r-g) PR is assumed constant