TTM PE, or Trailing Twelve Months Price-to-Earnings ratio, is a valuation metric calculated by dividing a company's current share price by its earnings per share (EPS) over the past twelve months.
In more detail:
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Definition: TTM PE represents the ratio of a company's current share price to its total earnings per share over the preceding four quarters (one year).
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Calculation:
- Find the company's current stock price.
- Calculate the company's EPS for the last four quarters. This data is readily available as companies publicly report their quarterly earnings.
- Divide the current stock price by the TTM EPS.
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Formula:
TTM PE = Current Stock Price / Trailing Twelve Months EPS -
Example: If a company's stock price is $50 and its TTM EPS is $2.50, the TTM PE is 20 ($50 / $2.50 = 20).
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Significance: Investors use the TTM PE ratio to assess whether a stock is overvalued, undervalued, or fairly valued relative to its earnings. It's a backward-looking metric, based on actual reported earnings, making it a popular and easily verifiable measure.
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Advantages:
- Uses readily available, verified earnings data.
- Provides a quick snapshot of valuation based on recent performance.
- Allows for comparison of companies within the same industry.
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Disadvantages:
- Backward-looking; it doesn't reflect potential future earnings growth.
- Can be skewed by one-time events or accounting anomalies in the past year.
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Comparison to Forward PE: While TTM PE looks at past earnings, Forward PE uses estimated future earnings. Forward PE is calculated by dividing the current share price by the projected EPS for the next four quarters. Forward PE is considered more speculative as it relies on estimates, which can be inaccurate.
In summary, TTM PE is a straightforward and commonly used valuation tool that uses a company's past year's earnings to provide an indication of its current market valuation.
