Forward vs Trailing Multiples
A multiple built on last year's earnings and a multiple built on next year's forecast earnings can tell opposite stories about the same company — the choice between them is not a technicality.
Prerequisites: Selecting a Defensible Comparable Set
A company trades at 30x its earnings from the year that just ended. Alarming, until you learn that analysts expect earnings to double next year — on that basis, the stock trades at 15x forward earnings, a much more ordinary number. Same company, same share price, two multiples that look like they belong to two different businesses, purely because one is measured against the past and the other against the future.
A trailing multiple divides price (or enterprise value) by the last twelve months of actual, reported earnings. A forward multiple divides by analysts' consensus forecast for the next twelve months. Forward multiples are lower than trailing multiples whenever earnings are expected to grow, and higher whenever they're expected to shrink — the gap between the two is itself information.
Why the choice matters, not just the label
Trailing multiples use a number that is known and unambiguous — it already happened and was reported. Their weakness is that they say nothing directly about the future, which is what a valuation is actually trying to price; a company whose earnings are about to collapse can look cheap on a trailing basis right up until they do.
Forward multiples price against what the market actually expects to happen, which is closer to what should theoretically drive value. Their weakness is that the denominator is a forecast, not a fact — it can be wrong, and it can vary by data provider depending on which analysts are included in the consensus.
The gap between a company's trailing and forward multiple is a direct, quick read on the market's expected earnings growth: a stock trading at 25x trailing but 18x forward implies the market expects roughly 39% earnings growth () over the coming year, all else equal.
Worked example
Two retailers both currently earn $2.00 in earnings per share and both trade at $30, so both show an identical trailing P/E of 15x.
- Retailer A is opening new stores rapidly; consensus expects EPS of $2.60 next year. Forward P/E: x.
- Retailer B is losing market share to online competitors; consensus expects EPS of $1.60 next year. Forward P/E: x.
- Despite an identical trailing multiple, Retailer A looks meaningfully cheaper than Retailer B once the multiple is measured against where earnings are actually headed — the trailing number alone would have suggested they were priced the same.
What this means in practice
When comparing companies with a comparable set, use the same basis (trailing-to-trailing, or forward-to-forward) across every company — mixing a target's forward multiple against peers' trailing multiples manufactures a false discount or premium. Forward multiples are the norm in most equity research because they price the year the market is actually looking at, but they require trusting a consensus forecast that can be revised, and disagree across data providers depending on which estimates are pooled.
A stock that looks cheap on a trailing multiple but expensive on a forward multiple is not a bargain — it is the market pricing in an earnings decline that a trailing number, by construction, cannot see yet. Always check both, and treat a large trailing-forward gap as a signal to understand why growth is expected to change, not as free information to ignore.
Related concepts
Practice in interviews
Further reading
- Damodaran, Investment Valuation (ch. 'Relative Valuation')