Types of Price To Earnings Ratio
There are four primary categories of Price to Earnings Ratio (P/E ratio), a valuation metric used to assess a company's stock price, which are organized based on the type of earnings used in the calculation.
Main Categories
- Trailing P/E Ratio — calculated using the company's historical earnings over the past 12 months, providing a snapshot of the company's current valuation, with Coca-Cola being a notable example, as its trailing P/E ratio is often used as a benchmark for the consumer goods industry.
- Forward P/E Ratio — based on estimated future earnings, offering a glimpse into the company's potential growth prospects, with Amazon being a prime example, as its forward P/E ratio reflects investors' expectations of the company's future expansion.
- Shiller P/E Ratio — also known as the Cyclically Adjusted Price-to-Earnings Ratio (CAPE), which uses the average earnings of the company over the past 10 years, adjusted for inflation, to provide a more nuanced view of the company's valuation, with Johnson & Johnson being a case in point, as its Shiller P/E ratio is often cited as an example of a stable company with a strong track record.
- Adjusted P/E Ratio — which takes into account non-recurring items, such as one-time gains or losses, to provide a more accurate picture of the company's underlying earnings, with Microsoft being a notable example, as its adjusted P/E ratio is often used to evaluate the company's financial performance excluding non-recurring items.
Comparison Table
| Category | Calculation Basis | Time Horizon | Example Company |
|---|---|---|---|
| Trailing P/E Ratio | Historical earnings | Past 12 months | Coca-Cola |
| Forward P/E Ratio | Estimated future earnings | Future 12 months | Amazon |
| Shiller P/E Ratio | Average earnings over 10 years | Past 10 years | Johnson & Johnson |
| Adjusted P/E Ratio | Underlying earnings excluding non-recurring items | Varies | Microsoft |
How They Relate
The Trailing P/E Ratio and Forward P/E Ratio are often used in conjunction to assess a company's current valuation and future growth prospects, with the Forward P/E Ratio being more relevant for companies with high growth expectations, such as Tesla. The Shiller P/E Ratio is commonly used to evaluate the valuation of the overall market, with a Shiller P/E Ratio above 25 indicating an overvalued market, according to Robert Shiller's framework. The Adjusted P/E Ratio is often used to compare companies with different accounting practices, such as General Electric and 3M, to provide a more accurate comparison of their financial performance. Furthermore, the Trailing P/E Ratio and Adjusted P/E Ratio can be used together to evaluate a company's current valuation and underlying earnings, with Procter & Gamble being a notable example, as its trailing P/E ratio and adjusted P/E ratio are often used to assess the company's financial performance.