Trailing P/E

The trailing P/E — often labeled TTM P/E, for trailing twelve months — is the oldest and most widely quoted valuation ratio in equity analysis. Its appeal is simplicity and verifiability: the denominator comes from audited financial statements rather than analyst forecasts, so there is no estimation error baked in. If a stock trades at $150 and reported $6.00 in EPS over the prior four quarters, its trailing P/E is 25 times. Every major financial data provider calculates and displays it the same way.

Historically, the S&P 500 trailing P/E has averaged roughly 15 to 16 times earnings over the long run, though the range has been wide — dropping below 10 during the pessimism of the early 1980s and spiking above 40 during the dot-com bubble. Buffett and Munger at Berkshire Hathaway have long used a variant of the trailing P/E as a primary sanity check when evaluating whole-company acquisitions: they look at the after-tax earnings power of the business relative to the price they are paying, essentially the inverse of the P/E (the earnings yield), and compare it to what they could earn by simply holding long-term Treasury bonds.

The trailing P/E has meaningful limitations. For companies with highly volatile or cyclical earnings, a single year's results can distort the ratio substantially. A commodity producer that just experienced a record-price year might post a trailing P/E of 5, which appears cheap; but if commodity prices normalize, normalized earnings could be a fraction of the trailing figure, making the stock far more expensive on a normalized basis. This was a persistent issue for oil and gas producers like ExxonMobil and Chevron during commodity price swings.

One-time items — asset sales, impairment charges, litigation settlements — can further distort reported earnings. Most serious analysts therefore adjust trailing earnings to exclude non-recurring items, arriving at 'adjusted' or 'core' EPS. The resulting adjusted trailing P/E is more comparable across periods and companies, though it introduces subjectivity about which items truly are non-recurring.

The trailing P/E also says nothing about the future. Two companies with the same trailing P/E can be in vastly different situations if one is growing earnings at 20% annually and the other is flat or declining. Comparing trailing P/E across companies with different growth profiles without also examining the growth trajectory is a common mistake among newer investors. The ratio is most useful as part of a broader analytical framework rather than as a standalone verdict.