growth is too far removed from the reliable information we need to
make informed decisions.
PE as it is usually applied may also be called the trailing PE be-
cause it is based on comparisons between current price and previ-
ously reported EPS. Another variation, called anticipated PE, or
forward PE, is an attempt to identify likely PE levels in the future.
Trailing PE is based on established price and earnings values, so in
comparison, it is at the very least an objective form of the ratio. For-
ward PE is based on an estimate of future earnings and future price.
So, using a target for both sides of the equation means that forward
PE can be made to appear any way we want. Both sides are esti-
mates, but if even one side is wrong, the entire ratio is unreliable. For-
ward PE, because it combines earnings estimates and price targets,
is a dubious form of the ratio.
This raises a related question: What is the purpose of perform-
ing forward PE? We begin with the premise that trailing PE is flawed
because it compares current price to historical earnings, those earn-
ings were not audited, and no core earnings adjustments were made.
Why would we want to make an estimate about PE in the future? If
we think about what the ratio reveals, then we also realize that it pro-
vides no tangible value. PE is a reflection of the market’s perception
about growth potential; the multiple of earnings reflected in price
provides us with a comparative view of how price relates to actual
earnings. In trying to track PE into the future, we make a broad as-
sumption about perception, even though we cannot know what that
perception will look like six, nine, or 12 months from now. We are
better off staying with the more reliable trailing PE, even with its
limitations as an indicator.
The predictability problem is not limited to the unknown future
earnings and market price levels; The problem is aggravated when
the price is more volatile than we would like. If PE has been highly
unpredictable due to price volatility, then its value as an indicator will
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