Introduction
The price-to-earnings (PE) ratio has long been one of the most trusted financial ratios for stock valuation. However, modern market behaviour has made it clear that PE alone is no longer a reliable decision-making tool.
In this article, let’s explore the difference between Trailing PE and Forward PE, how each works, their real-world relevance, and when to ignore them altogether.
What is Trailing PE Ratio (TTM)?
Trailing PE stands for Trailing Twelve-Month Price to Earnings Ratio.
Formula:
Trailing PE = Current Market Price / EPS (last 12 months)
This ratio tells you how much investors are willing to pay today for ₹1 of past earnings.
It’s backwards-looking — based on reported earnings, not future potential.
What is the Forward PE Ratio?
Forward PE tells you how much an investor is paying today for ₹1 of expected future earnings, usually based on the next 12 months of projections.
Formula:
Forward PE = Current Market Price / Estimated EPS (next 12 months)
These estimates are often sourced from analysts or company guidance.
Rule of Thumb:
- If Forward PE < Trailing PE → Future earnings are expected to improve → seen as positive
- Yes, it is wise to invest after checking other fundamental factors like the PEG ratio.
- If Forward PE > Trailing PE → Future earnings growth is weak or slowing → seen as negative or Earnings are expected to slow down or Decline.
- Is It Wise to Invest? Only if:
- You have the conviction that the earnings decline is temporary, or
- The company has a turnaround plan or cyclical recovery ahead, or
- You’ve done deep fundamental analysis beyond PE ratios.
- Is It Wise to Invest? Only if:
When This Works — and When It Doesn’t
Stable Large-Cap Companies
- If Forward PE < Trailing PE, it may signal undervaluation.
- Works well for long-term, steady-growth companies (e.g., FMCG, IT).
High-Growth Stocks
- Forward PE can be higher than Trailing PE — and that’s okay!
- Future earnings may surge rapidly, temporarily inflating the forward PE.
- Don’t penalise growth stocks for this — focus on EPS momentum instead.
Is It Safe to Buy High PE Ratio Stocks?
Old wisdom says, “Avoid stocks with PE>30, ” but the rule is outdated.
Why?
- PE is a static snapshot
- Doesn’t reflect growth velocity
- Many stocks with a PE>50 (e.g., Nestle, Britannia) delivered massive returns
Instead, focus on:
- Quarterly EPS, revenue, and operating profit growth
- Ideally, look for 20%–50% YoY or QoQ growth
Avoid buying low-growth stocks just because the PE is low
- To set target price estimates for the next 12 months
- To read analyst reports and consensus expectations
- To compare large-cap stocks for long-term portfolios
🔍 So, When Is the PE Ratio Actually Useful?
However, it’s no longer a standalone buy/sell signal.
Don’t Buy Low PE Stocks Blindly
A PE of 10–15 doesn’t mean a stock is cheap.
Unless the company is growing earnings at 20% or more per quarter, that “low PE” is likely a value trap.
What’s the Right Way to Value Stocks Today?
Start combining:
- PE Ratio
- Growth Rate
- Use the PEG Ratio (Price/Earnings to Growth) → We’ll explain this in our next blog & video!
Conclusion
- PE ratio has evolved — it’s no longer a silver bullet
- Trailing and Forward PE give context, not answers
- Use them with growth metrics, not in isolation
- Focus on consistent revenue, EPS, and OPM growth
- PEG ratio offers better clarity for fast-growing companies
