Chartered Financial Analyst (CFA) Practice Exam Level 2

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In financial terms, what does "trailing PE" refer to?

  1. Price to Earnings based on future growth

  2. Price to Earnings based on historical earnings

  3. Forward-looking price to earnings ratio

  4. Price to Earnings adjusted for inflation

The correct answer is: Price to Earnings based on historical earnings

Trailing PE, or trailing price-to-earnings ratio, is calculated using a company's earnings from the most recent four quarters. This metric takes the current stock price and divides it by the earnings per share (EPS) from the past year, reflecting historical earnings performance. It is a widely used measure to assess how much investors are willing to pay for each dollar of earnings, based on past results. This concept helps investors gauge the relative value of a company's shares compared to its earnings, allowing for comparisons across different companies and industries. It's particularly useful because it reflects actual earnings as opposed to forecasts, providing a clearer picture of a company's recent financial performance.

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