forward trailing p/e understand, forward, months, should, price

Walex

hi guys,
does anyone know why justified trailing p/e is (1-b)(1+g)/ (r-g)
while justified forward p/e = (1-b)/(r-g)

I thought that trailing shouldn't have the (1+g) in the numerator while forward should. I don;t understand why we would use (1+g) in the numerator if we're calculating the last twelve months' price and earnings.

Any ideas?

tarunajwani

The TRAILING P/E is using E0 where the LEADING P/E is using E1

P/E0 so we increase it by 1+g
P/E1 is already future earnings so we don't need to increase it.

It can be silly because when you work it out, trailing will often be greater than leading.

ayaz_mahmud369

but if we are using p/e0, then why do we need to increase it by (1+g)?
my thinking is if we do increase it by (1+g), then it will equal E1.
no?

tianxin

Because P/E is a function of future earnings. It is a basically an idea that the price now is based on the expectation of receiving said earnings in the future that's why you must grow your current earnings to the future earning expectation.

tobeornottobe

I was confused on this one for a while too.

We want to find trailing P/E. Our handy little formula is P/E0= ((1-b)(1+g))/(r-g)

We know that the GGM model is P=(D0(1+g))/(r-g). Swapping in the retention ratio allows us to use the current year's E0. The trailing P/E is not discounted whereas the leading P/E has been discounted by (1+g) as reflected in E1.

yospaghetti

Chuckrox: (1-b) is the PAYOUT ratio. Payout ratio is also D/E which is why P/E = (1-b)/r-g.

Now I'm going to my my P, in her V.

liquidity

Ahh...Freudian slip of the tongue. Everything has completely started to melt together in my brain.