Price to earnings ratio

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helloatlas

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Trailing P/E
P0/E0 = (1-b) (1+g)/ (Rce - g)
Can this be rewritten as
P0/E0 = D0 / (Rce - g)
Since Leading P/E is
P0/E1 = D1 / (Rce -g)
And can I say then leading P/E is also
P0/E1 = (1+b) (1+g)^2 / (Rce-g)
Essentially I guess I’m trying to ask how is the dividend payout ratio is equivalent to the dividend amount getting paid
Many thanks
 
Dividend payout ratio determines the dividend amount getting paid
ie..
If you have Net Income of $100 and a payout ratio of 70% the amount of dividend paid would be $70 (or $70/share count for dividend per share)
Does that help?
 
If (1-b) is your dividend payout ratio, then your formula is correct. You asked,
“How dividend payout ratio is equivalent to the dividend amount getting paid”
If I understand your question right, you confusing the payout ratio (which is a % number) with the dividend amount (which is a dollar amount, not a %). This means you confusing the P/E equation with just Price valuation equation. Let’s see:
P = D*(1+g) / (Re - g)
If I divide both sides with Earnings per share (E), I get:
P/E = (D/E)*(1+g) / (Re - g) , where D/E is the dividend pay out ratio (%)
In your terms would be P/E = (1-b)*(1+g) / (Re - g)
Hope this helps!
 
Hi guys thanks. No wasn’t confused with dividend payout ratio vs divdidend amount but yes was probably confusing P/E equation with price valuation
It makes sense now
One more thing
I was looking at financialhelp123 (S2000magician’s website) and found that it says the trailing P/E ratio is merely the leading P/E ratio multiplied by (1+g)
Trailing P/E should be smaller so I thought it would be the other way round where Leading P/E ratio is Trailing P/E ratio * (1+g)
As I understand, the trailing P/E is based on historical values and the leading is one period after
I might be missing out smth or gone wonky with these
Enlighten me?
 
Current price: $100
Trailing EPS: $10
Growth rate: 5%
Leading EPS: 10 (1.05) = $10.50
Trailing P/E: 100 / 10 = 10x
Leading P/E: 100 / 10.50 =9.5238095238x
Leading P/E x (1 + g) =9.5238095238 (1.05) = 10x
If there’s a positive growth rate, the denominator (EPS) will be higher under the leading methodology. Since you divide the same price (numerator) by a larger denominator (leading EPS), it produces a smaller ratio (p/e).
 
Would You Look at That wrote:Current price: $100
Trailing EPS: $10
Growth rate: 5%
Leading EPS: 10 (1.05) = $10.50
Very clear thank you.
Trailing P/E: 100 / 10 = 10x
Leading P/E: 100 / 10.50 =9.5238095238x
Leading P/E x (1 + g) =9.5238095238 (1.05) = 10x
If there’s a positive growth rate, the denominator (EPS) will be higher under the leading methodology. Since you divide the same price (numerator) by a larger denominator (leading EPS), it produces a smaller ratio (p/e).
Click to expand...
 
helloatlas wrote:Trailing P/E should be smaller so I thought … Enlighten me?
Click to expand...
Thinking out loud—say you had a stock trading at $25 and it had just reported the year’s net income (per share) of $1. The P/E ratio would be 25. If the company had positive ROE and didn’t give too much of it away as dividends, and let’s say we expected next year’s net income or earnings (per share) to be $2 (which is an insane increase, but shows my point), then the forward P/E ratio would be 12.5, which is smaller than the trailing.
Think of the fractions and how the denominator gets bigger with the leading, making the ratio smaller, since each dollar you spend at t=0 is going to get you more earnings at t=1, since E1 is just E0 x (1+g) based on Gordon. Hold the price, which is the numerator, constant in your head.
Trailing: P0 / E0 vs. Leading: P0 / [E0 x (1+g)]
 
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