# justified p/e vs. leading p/e

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

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

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

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

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.

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

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!

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