How to Trail PE Ratios
Original post by Jonathan Langsdorf of Demand Media
The price-to-earnings or P/E ratio is a widely used stock valuation metric. The ratio is the current share price of a stock divided by the company's earnings per share. Investors use several forms of the P/E ratio, referred to as the trailing, rolling and forward P/E. The P/E ratio reported on financial websites is usually the trailing P/E. To trail the P/E of a stock involves keeping track of the two components making up the ratio and updating the calculation each time the company reports earnings updates.
Find the four most recent quarterly earnings reports on the investor relations Web page of the stock for which you want to calculate a trailing P/E. Publicly traded companies are required to report quarterly revenues and profits four times a year. These companies typically discuss the latest results and guide on future expectations in quarterly earnings reports.
Look up, write down and total the net income per share in each of the four most recent quarterly earnings reports. The net income per share is often highlighted in the opening remarks of a press release, and it also appears in the income statement of the report. For example, the income per share for Google from the four most recent quarters at the time of publication was $6.72, $7,81, $5.51 and $7.68. Total net income per share for the four quarters was $27.72.
Divide the current share price by the calculated earnings per share to get the current trailing P/E ratio. As an example, if Google's stock trades at $549 per share, the current trailing P/E is $549 divided by $27.72, and the trailing P/E ratio is 19.8. The P/E ratio can be updated as the stock price changes from day to day throughout the current fiscal quarter.
Replace the oldest quarterly per-share earnings amount with the latest figures when the company reports new quarterly financial data. For example, if Google reports earnings per share of $9.00 in its next earnings release, the $6.72 from a year ago would be dropped and the $9.00 added in, bring the trailing earnings to $30. The trailing P/E is then calculated using this new earnings total.
Tips & Warnings
- The forward P/E ratio uses the estimated earnings for the next 12 months as the earnings portion of the "price divided by earnings" calculation.
- A rolling P/E ratio uses the two most recent quarterly earnings per share numbers plus the estimated earnings for the two upcoming fiscal quarters.
- Stanford.edu: What is P/E?
- USA Today; Forward P/E or trailing P/E? Why not both?; Matt Krantz; July 30, 2009
- Google Finance: Google Inc. Financials
About the Author
Jonathan Langsdorf has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Langsdorf has a bachelor's degree in mathematics from the U.S. Air Force Academy.
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