Types of P/E Ratio Explained: Trailing P/E vs Forward P/E

July 6, 2026

We know finding the right valuation of anything is the most important part in finance. Therefore, this content is about one of the most important valuation metrics, the P/E ratio, which can help investors, especially beginners, to invest in a worthy stock, mutual fund, or company.

So let’s have a closer to the P/E ratio, meaning, and types.

What is the P/E ratio?

The P/E ratio shows how much investors are willing to pay for every ₹1 of a company’s earnings. It helps investors understand whether a stock is expensive or cheap compared to its profits.

Though finding the P/E ratio’s importance is useful for people to know more about a company’s valuation, it assists them in making better decisions.

What are the types of P/E ratios?

1. Absolute P/E ratio

The Absolute P/E Ratio is the current market price of a share divided by the company’s Earnings Per Share (EPS), which can be based on past earnings (Trailing EPS) or expected future earnings (forward EPS).

Formula:

Absolute P/E = Current Share Price ÷ EPS

2. Relative P/E ratio

The relative P/E ratio is the current P/E ratio relative to a benchmark, such as the industry P/E, the market P/E, or the past P/E.

The relative P/E ratio reflects the company’s overall consistency, including past earnings, and whether the stock is overvalued.

If a company’s P/E ratio is 20 and the industry’s P/E ratio is 15, then the company’s stock is considered overvalued.

3. Trailing P/E Ratio

The Trailing P/E Ratio is calculated by dividing the current market price of a share by the company’s earnings per share (EPS) from the past 12 months.

Formula:

Trailing P/E = Current Share Price ÷ EPS (last 12 months)

This ratio is based on actual historical earnings, which makes it more reliable than estimates.

4. Forward P/E Ratio

The Forward P/E Ratio is the price-to-earnings ratio calculated using a company’s expected future earnings instead of past earnings.

Formula:

Forward P/E = Current Share Price ÷ Expected Future EPS

This ratio uses estimated earnings (usually for the next 12 months) based on analysts’ or the company’s growth projections.

Let’s understand step by step the difference between Trailling P/E and Forward P/E.

	Trailing P/E	Forward P/E
Defination	Trailing P/E: Shows how much investors pay for ₹1 of a company’s earnings over the past year.	Forward P/E: Shows how much investors pay for ₹1 of a company’s expected future earnings.
Calculation	Trailing P/E is calculated by dividing the current share price by the company’s earnings per share (EPS) over the past 12 months.	Forward P/E is calculated by dividing the current share price by the company’s expected future earnings per share (EPS).
Type	Trailing P/E is based on historical performance.	Forward P/E is a forecast of a company’s earnings.
Importance	Investors can get more reliable and accurate data on the company.	Investors can receive the estimated profit.
Information	It is good for checking the past performance of companies.	It is satisfactory for checking the company’s future earnings planning.
Limitation	This can not show future growth.	This can not show realistic data as it is optimistic.
Example	A company earned ₹50/share last year, stock price ₹500 → Trailing P/E = 10.	Analysts expect the company to earn ₹60/share next year, stock price ₹500 → Forward P/E ≈ 8.33.

How to calculate the Trailing P/E ratio and Forward P/E ratio?

1. Trailing P/E Ratio Calculation:

It is based on the company’s past 12 months’ earnings.

Formula:

Trailing P/E = Current Market Price per Share ÷ Earnings per Share (EPS) of last 12 months

Example:

If share price = ₹200
EPS (last 12 months) = ₹20
Trailing P/E = 200 ÷ 20 = ₹10

2. Forward P/E Ratio

It is based on the company’s expected future earnings (next 12 months).

Formula:

Forward P/E = Current Market Price per Share ÷ Expected Future EPS

Example:

If share price = ₹200
ExP/Ected EPS (next year) = ₹25
Forward P/E = 200 ÷ 25 = ₹8

Conclusion

Understanding the IPOs and their P/E ratio can help investors make more informed decisions. By analysing key financial metrics like the P/E ratio, investors can better assess a company’s valuation and growth potential before participating in an IPO. Platforms like IPOWatch provide information on upcoming IPOs, including important metrics such as P/E ratios. This can help investors to understand the companies more precisely and help them to make proper investment decisions.

FAQs

1. What does a high Trailing P/E mean?

A high Trailing P/E means investors are paying a lot for each ₹1 of the company’s past earnings, and shows the stock could be expensive and future growth.

2. What does a low Trailing P/E mean?

A low Trailing P/E means investors are paying less for each ₹1 of the company’s past earnings, and the stock could be undervalued and underperforming.

3. Is a high Trailing P/E always bad?

No, high P/E can also mean investors expect strong future growth, and it shows investors are ready to pay a high amount for the company’s earnings.

4. Is Trailing P/E based on actual data?

Yes, it uses actual earnings from the last 12 months (TTM). It uses the company’s real earnings from the past 12 months (TTM Trailing twelve months) to calculate how much investors are paying for each ₹1 of earnings.