1. ## justified trailing vs. leading PE

Date: February 25, 2011 06:04PM

When calculating justified trailing P/E why are we calculating the numerator by 1+g?

It seems, intuitively at least, that we would calculate leading P/E by the growth figure to obtain a future estimate and use previous figure for trailing.

Thanks,

John

2. Date: February 25, 2011 07:49PM

you always calculate the numerator with *(1+g), regardless of trailing, forward to justified ratio.

for a trailing PE ratio the thing trailing is the earnings. the reason we do this is there is no connection between the numerator (with 1+g in it) and the earnings. you see that because you use 1+g no matter what - justified, trailing or forward PE.

the (1+g) divided by (whatever) is how you get the PRICE, not the earnings. so again there is no relation there. it is Price = D(1+g)/r-g ; we divide by earnings to get our ratios (trailing, forward etc).

3. Date: February 25, 2011 09:57PM

starbuck that's not correct only trailing justified p/e is calculated by scaling up the numerator with (1+g). There's no need to do that with the leading version because you're dealing with earnings one period foward already. Pay close attention to the subscripts.

4. Date: February 26, 2011 12:02AM

Right you always have to make it 1 period out by scaling it up with (1+g).

Like I said the numerator and denominator in DDM or FCF models calculate the PRICE, it has nothing to do with the earnings. When you divide by earnings (to get trailing or forward PE) you just have to divide that value by an appropriate earnings number (trailing or forward). Again the (1+g) is not linked to the earnings only the Price.

When you are given leading earnings or trailing earnings that is the denominator of PE, which is separate from the numerator. The numerator always uses (1+g) to scale up dividends/FCF from today. But if you are given FCF or Dividends in 1 year then you do not have to scale them up.

5. Date: February 26, 2011 01:01PM

starbuk Wrote:
-------------------------------------------------------
> you always calculate the numerator with *(1+g),
> regardless of trailing, forward to justified
> ratio.

Yeah so actually you didn't say that at all. You're still overdoing it again.

All that needs to be said is that you pay attention to the subscript and scale up in the case of lagging earnings with (1+g) or not with leading. No need to over complicate.

6. Date: February 26, 2011 01:31PM

Im not over doing anything. You have to get D(1) or FCF(1) no matter what so you do have to multiply by (1+g). If you have FCF(1) and you do it again then you are messing up. He is asking why you multiply by growth rate, not if we have FCF0 or FCF1, so my answer to multiply by (1+g) is correct since it is a part of every equation in order to get to FCF1 or D1.

Anyway his question was not about that at all, if you read 90% of my post you would see it focused on why earnings being trailing or leading has nothing to do with the (1+g) term which I explained.

7. Date: February 26, 2011 01:33PM

P.S. you are not correct when you say that you do not scale up with (1+g) with trailing earnings. The 1+g gets you the price, what you do with the earnings (trailing or leading) is independent of how you calculate price.

I do not want to come off as rude, I just think that we are not understanding the question correctly since the formulas are pretty simple.

8. Date: February 26, 2011 04:21PM

Andrew3032 Wrote:
-------------------------------------------------------
> starbuk Wrote:
> --------------------------------------------------
> -----
> > you always calculate the numerator with *(1+g),
> > regardless of trailing, forward to justified
> > ratio.
>
> Yeah so actually you didn't say that at all.
> You're still overdoing it again.
>
> All that needs to be said is that you pay
> attention to the subscript and scale up in the
> case of lagging earnings with (1+g) or not with
> leading. No need to over complicate.

Dude... seriously... are you really this stupid? Your right the formulas are pretty simple. I think you just have an ego problem, and feel insecure about being wrong. Get over it.

9. Date: February 26, 2011 05:07PM

@#\$%& you Andrew

Edited 1 time(s). Last edit at Saturday, February 26, 2011 at 05:10PM by starbuk.

10. Date: February 28, 2011 06:04PM

John -

My posts replied to this question. The calculation of price is d(1+g)/(r-g) per the DDM. All we do to get leading or trailing is just divide that by E0 or E1.

So the calculation of price is independent of which earnings you are using. If you want an answer as to why the DDM uses (1+g), you will have to refer to the derivation of the DDM equation.

#### Posting Permissions

• You may not post new threads
• You may not post replies
• You may not post attachments
• You may not edit your posts
•