Decode Earnings with 12 Infographics
09 PE Ratio explained: calculating with LFY, TTM, and forward methods
The PE ratio is a common valuation metric used for stocks that have stable earnings. It represents the ratio between a stock's current price and its earnings per share. There are three types of PE ratios: static PE, rolling PE, and forward PE.
1. PE LFY
PE LFY (Price-to-Earnings Last Fiscal Year) is a valuation metric calculated by dividing a company's market capitalization by its net profit from the previous fiscal year. This method is straightforward, and the figure is shown in the company's latest annual report. However, as it uses old financial data, it may not reflect the current state of the company's profitability.
2. PE TTM
PE TTM (Price-to-Earnings Trailing Twelve Months) is a valuation metric calculated by dividing a company's market capitalization by its net profit over the past 12 months. For example, after a company releases its third-quarter report, the cumulative net profit for that year's first three quarters plus the net profit from the fourth quarter of the previous fiscal year will be used to calculate the rolling PE ratio. Compared with PE LFY, this calculation takes into account the most recent financial report and provides a current snapshot of the company's profitability, making it potentially a better choice for ordinary investors.
3. Forward PE ratio
The forward PE ratio is calculated by dividing a company's total market value by its estimated net profit for the current or future fiscal year. Usually, analysts' average forecasts for the company's net profit are used to estimate future earnings. Some financial estimates can also be found on moomoo.
The forward PE ratio is a valuation metric that considers expectations for a company's growth over the next few years. This makes it one of the most timely indicators of a company's potential future earnings. However, this estimate relies on analysts' forecasts, which may not always be accurate.
