Lesson 5 of 5 11–14% of the exam

By Daniil Tarakanov Updated Oct 22, 20262027 curriculum

Trailing, current and forward multiples

Trailing multiples use the last 12 months, forward multiples the next 12 months (or the next fiscal years), current multiples the latest reported figures. Past multiples show trends against the company's own history and its peers'. Projected multiples compare future value and often set a terminal value.

6 min cram, 28 min full read. Based on the 2027 CFA® Program Level I curriculum, Equities, Learning Module 7.

Tailor this to you: take the self-assessment

Before this: Valuing with multiples: comparables and forecasted fundamentals, Price multiples: P/E, earnings yield, P/S, P/B and dividend yield

On the exam

Describe the use of multiples based on past, current, and projected future values in estimating equity value

Describe the use of multiples based on past, current and projected values. Expect trailing against forward price-to-earnings (P/E) ratios from quarterly and forecast earnings per share (EPS), why current multiples can mislead, what own-history and peer-history comparisons can and cannot show, a forward P/E for a firm that is loss-making today, a terminal value from a multiple discounted to today, which peers set a terminal multiple, and why a whole peer group can be mispriced.

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

You know this one. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still do.

You tested strong here. The full lesson is folded away. The takeaways, formulas and checkpoint below are your quick refresher, and the checkpoint is a fair test of whether you still know it.

What are trailing, current and forward multiples?

The same price can sit over earnings from different periods. A trailing multiple uses the prior 12 months (for EPS, the last four quarters, $EPS_t$ ). A forward multiple uses the next 12 months (for EPS, analysts’ consensus $EPS_{t+1}$ ). The FY1 and FY2 multiples , from fiscal year 1 (FY1) and fiscal year 2 (FY2), use forecasts for the next fiscal year and the one after. A current multiple sets today’s price or enterprise value against the most recently reported figures, typically for the latest quarter.

Trailing and forward P/E Memorize

\text{Trailing P/E} = \frac{P_t}{\text{EPS}_t}, \quad \text{Forward P/E} = \frac{P_t}{\text{EPS}_{t+1}}

Use the same basis for the company and its peers, and prices from the same date: same-date prices stop market moves between reporting dates from distorting a comparison. Different fiscal year-ends still leave the denominators at different dates (Lesson 1).

Which period the multiple uses

Time basis of a multiplesame basis and same price date for every firm

Current Know the idea latest reported figures; exposed to one-time items and the cycle
Past Memorize historical multiples
- Own history trend of the company's performance
- Peer historical averages relative performance under similar conditions
Trailing Memorize prior 12 months, EPS_t
Forward Memorize next 12 months, EPS_{t+1}; FY1, FY2
Projected for a terminal value Memorize year-n figure × multiple from mature peers

Why can current multiples mislead?

A single recent period carries its one-time items, its accounting choices and its place in the economic cycle. A firm at the bottom of the cycle shows a high P/E, and at the top a low one. This is the multiples version of the base-year effect in present value models: the starting year may not be typical. The fix is to look at past multiples and expected future ones too, and at normalized EPS (Lesson 2).

What do past multiples show?

Historical multiples show the trend of the current multiple against the past, in two ways:

The own-history comparison checks whether the company’s performance is deteriorating or improving in a way that may continue.
A comparison with peer historical averages shows how the company has done relative to a benchmark under similar market and business conditions over time.

When averaging past P/Es, leave out the loss years in a multiple average : a negative P/E is not meaningful.

Worked example Dalmore Brewing

Dalmore’s P/E over the last five years was 18.0, 16.5, not meaningful (a loss year), 15.0 and 14.5. Today it trades at 13.0. Its peers averaged 14.0 over the same years and trade at 12.0 today.

Own average of the four meaningful years = (18.0 + 16.5 + 15.0 + 14.5) ÷ 4 = 16.0.
Today’s 13.0 is (16.0 − 13.0) ÷ 16.0 = 18.75% below its own average.
Premium to peers on average = 16.0 ÷ 14.0 − 1 = 14.3%. Premium today = 13.0 ÷ 12.0 − 1 = 8.3%.

So Dalmore has traded at a premium to its peers on average, and the whole sector has de-rated while Dalmore’s premium has narrowed.

On your calculator

18+16.5+15+14.5=÷4= 16.0
16−13=÷16= 0.1875
16÷14−1= 0.1429
13÷12−1= 0.0833

18ENTER16.5+15+14.5+4÷ 16.0
16ENTER13−16÷ 0.1875
16ENTER14÷1− 0.1429
13ENTER12÷1− 0.0833

ENTER enter (on the HP, puts the number on the stack)

What history cannot tell you matters just as much. A share below its own average P/E is not proven cheap. The company’s strategy, operations or peers may have changed, and so may the multiple it deserves. Comparing a company only with its own past does not show misvaluation; comparables and fundamentals are needed (the method of forecasted fundamentals can estimate how much the changes should move the multiple).

Exam tip History shows the trend; peers and fundamentals show whether the price is wrong.

What are projected multiples?

Projected future multiples put forecasts in the denominator (forward P/E, FY1, FY2) to compare a company with a benchmark on expected rather than past results. They rescue the comparison for a forward P/E of a loss-making firm , whose trailing P/E is not meaningful.

How does a multiple set a terminal value?

The most common use of a projected multiple is the terminal value from a multiple in a present value model. Forecast cash flows for n years, then value everything after year n as the year-n figure times a multiple.

Present value with a terminal multiple Use it

IV_0 = \sum_{t=1}^{n} \frac{E(CF_t)}{(1 + r)^t} + \frac{E(P_{t+n})}{(1 + r)^n}, \quad E(P_{t+n}) = \text{year-}n\text{ fundamental} \times \text{multiple}

The multiple should come from the terminal value peer group : firms that look like the company at the end of the forecast. That means usually larger, slower-growing, mature firms, not today’s fast-growing peers and not the company’s own past multiples.

Worked example Orsolo Diagnostics

Orsolo has base-year free cash flow to equity (FCFE) of CHF 40.0 million, expected to grow 15% a year for three years. Its cost of equity is 11%. Mature diagnostics firms trade at 14 times FCFE.

FCFE: year 1 46.00, year 2 52.90, year 3 60.835.
Terminal value at year 3 = 60.835 × 14 = 851.69.
Present values of the forecast FCFE: 46.00 ÷ 1.11 = 41.44; 52.90 ÷ 1.11² = 42.93; 60.835 ÷ 1.11³ = 44.48. Sum = 128.86.
Present value of the terminal value = 851.69 ÷ 1.11³ = 622.75.
Intrinsic value today = 128.86 + 622.75 = CHF 751.61 million, of which 82.9% comes from the terminal value.

Traps: discounting the terminal value two years instead of three gives 820.11. Not discounting it at all gives 980.55. Using today’s fast-growing peers at 22 times FCFE gives 1,107.46.

On your calculator

CF2NDCLR WORK
0ENTER↓46ENTER↓↓52.9ENTER↓↓912.525ENTER C03 = 60.835 + 851.69
NPV11ENTER↓CPT 751.61

CF cash flow worksheet · 2ND second function (the shifted label above a key) · CLR WORK clear the worksheet · ENTER enter (on the HP, puts the number on the stack) · NPV net present value · CPT compute

fCLEAR REG
0gCF046gCFj52.9gCFj912.525gCFj the last flow is 60.835 + 851.69
11i
fNPV 751.61

f gold shift key · CLEAR REG clear all registers · g blue shift key · CF0 cash flow at time zero · CFj cash flow j · i interest rate per period · NPV net present value

Rearrange itTerminal value from a multiple, in present value: solve for any input

The question asks for

An analyst expects a company's fundamental to be 60.84 at the end of year 3, and expects it to trade then at 14 times that figure, the multiple of mature peers. With a required return of 11.00%, the present value of that terminal value is closest to:

Year-n fundamental (FCFE, earnings or EBITDA)Terminal multipleRequired return, r%Years until the terminal value, n

P V (T V) = \frac{X _{n} M}{( 1 + r ) ^{n}}

60.84 × 14 ÷ 1.11^3 = 622.75

Present value of the terminal value622.75

On your calculator

60.835×14÷(1.11y^x3)=622.7484

y^x power

60.835ENTER14×1.11ENTER3y^x÷622.7484

ENTER enter (on the HP, puts the number on the stack) · y^x power

Learning Module 6 sets terminal values by constant growth, and Learning Module 8 sets them inside a full forecast.

Can the whole peer group be mispriced?

A share can look cheap against its peers and still be expensive against its intrinsic value, if the whole industry or market is overvalued. That is a misvalued peer group . Relative valuation tells you where a share stands in its group, not whether the group is right, so analysts practice combining relative and present value methods : a multiples verdict checked against a discounted cash flow estimate.

Exam tip Cheap against peers is not cheap.

InteractiveTrailing, FY1 and FY2: same price, different earnings

Try this 0 of 3

Time bases: find quarterly EPS that make the trailing P/E higher than FY2 by at least 5
History: make Dalmore trade below its own average but at a bigger premium to peers than usual
Terminal value: switch to today's fast-growing peers and see how much value comes from the terminal multiple

Loss-making last year (Ferrant Biotech)

Quarter 1 earnings per share (EPS)EURQuarter 2 earnings per share (EPS)EURQuarter 3 earnings per share (EPS)EURQuarter 4 earnings per share (EPS)EURShare price todayEURFY1 consensus EPS (next fiscal year)EURFY2 consensus EPS (the year after)EUR

Trailing price-to-earnings (P/E), last four quarters (EPS 3.00)16.00×

FY1 P/E12.80×

FY2 P/E11.43×

Latest quarter × 4 (trap)~~13.33×~~

A falling sequence of multiples means earnings are expected to grow. Annualizing only the latest quarter is neither trailing nor forward: avoid it.

Show working

Trailing EPS = 0.65 + 0.70 + 0.75 + 0.90 = 3.00; trailing P/E = 48.00 ÷ 3.00 = 16.00

FY1 P/E = 48.00 ÷ 3.75 = 12.80; FY2 P/E = 48.00 ÷ 4.20 = 11.43

On your calculator

0.65+0.7+0.75+0.9=trailing EPS 3.00
48÷3=trailing 16.00
48÷3.75=FY1 12.80
48÷4.2=FY2 11.43

0.65ENTER0.7+0.75+0.9+trailing EPS 3.00
48ENTER3÷trailing 16.00
48ENTER3.75÷FY1 12.80
48ENTER4.2÷FY2 11.43

ENTER enter (on the HP, puts the number on the stack)

Pick the period on purpose: trailing for what happened, forward for what is expected, mature peers for the end of the forecast.

Memorize this

MemorizeTime bases of multiples

Basis	Denominator	Use and limit
Trailing	prior 12 months (EPS $_t$ , last four quarters)	what happened; backward-looking
Current	latest reported figures	one-time items, accounting, cycle (base-year effect)
Forward, FY1, FY2	next 12 months or next fiscal years (EPS $_{t+1}$ )	meaningful for firms with losses today; depends on forecasts
Past (history)	own past multiples; peer historical averages	trends; cannot alone show misvaluation

Memory hook Trailing looks back, forward looks ahead, history shows the trend, peers show the level.

Know it cold Same basis and same price date for the company and every peer.

MemorizeTerminal values from multiples

Step	Rule
Terminal value	year-n fundamental × multiple
Which multiple	mature, larger, slower-growing peers
Discount	$(1 + r)^n$ , the full forecast length
Peer group check	a whole group can be mispriced; pair with present value methods

Memory hook Value the company you will own in year n, not the one you own today.

Know it cold $IV_0 = \sum E(CF_t)/(1 + r)^t + E(P_{t+n})/(1 + r)^n$ .

Which period the multiple uses

Time basis of a multiplesame basis and same price date for every firm

Current Know the idea latest reported figures; exposed to one-time items and the cycle
Past Memorize historical multiples
- Own history trend of the company's performance
- Peer historical averages relative performance under similar conditions
Trailing Memorize prior 12 months, EPS_t
Forward Memorize next 12 months, EPS_{t+1}; FY1, FY2
Projected for a terminal value Memorize year-n figure × multiple from mature peers

Trailing and forward P/E

\text{Trailing P/E} = \dfrac{P_t}{\text{EPS}_t}, \quad \text{Forward P/E} = \dfrac{P_t}{\text{EPS}_{t+1}}

Quick example

Price 54.00, trailing EPS 4.50 and consensus forward EPS 5.40: trailing P/E 12.0, forward P/E 10.0.

On your calculator

54÷4.5= 12.0
54÷5.4= 10.0

54ENTER4.5÷ 12.0
54ENTER5.4÷ 10.0

ENTER enter (on the HP, puts the number on the stack)

Present value with a terminal multiple

IV_0 = \sum_{t=1}^{n} \dfrac{E(CF_t)}{(1 + r)^t} + \dfrac{E(P_{t+n})}{(1 + r)^n}, \quad E(P_{t+n}) = \text{year-}n\text{ fundamental} \times \text{multiple}

Quick example

Cash flows of 10 in year 1 and 12 in year 2, a terminal multiple of 10 on the year-2 figure, required return 12%: 10 ÷ 1.12 + (12 + 120) ÷ 1.2544 = 114.16.

On your calculator

10÷1.12+(132÷1.2544)= 114.16

10ENTER1.12÷132ENTER1.2544÷+ 114.16

ENTER enter (on the HP, puts the number on the stack)

How it is asked

Trailing against forward

Quarterly EPS 0.85, 0.90, 1.00, 1.25; price 56; next-12-month EPS 4.80.

Trailing 56 ÷ 4.00 = 14.0; forward 11.67. Trap: latest quarter × 4, 11.2.
Terminal value

FCFE 20, 22, 25; 13 times FCFE at year 3; r_e 8%.

315.2. Traps: 335.9 (two years), 382.2 (not discounted).
Own history

P/E 19 against its own five-year average of 23.

Cannot conclude misvaluation without peers or fundamentals. Trap: "undervalued".
Terminal peers

High-growth firm, seven-year forecast.

Multiple from larger, slower-growing mature peers. Trap: today's high-growth peers.

Exam traps

Mixing trailing multiples for the company with forward multiples for the peers.
Annualizing the latest quarter and calling it trailing.
Declaring a share undervalued only because it trades below its own historical average.
Averaging historical P/Es with loss years included.
Discounting the terminal value one year too few, or not at all.
Taking the terminal multiple from today's fast-growing peers or the company's own past.
Forgetting that the whole peer group may be mispriced.

Checkpoint

3 exam-style questions. About 90 seconds each.

1A share trades at USD 66.00. Its earnings per share (EPS) for the last four quarters were USD 0.95, 1.05, 1.10 and 1.30, and analysts' consensus EPS for the next 12 months is USD 5.50. Its trailing price-to-earnings (P/E) ratio is closest to:
2An analyst forecasts a company's free cash flow to equity (FCFE) at GBP 12 million, GBP 14 million and GBP 16 million for the next three years. At the end of year 3 the analyst expects the company to trade at 16 times FCFE, the multiple of mature peers. With a cost of equity of 9%, the company's equity value today is closest to:
3A company's shares trade at a price-to-earnings ratio of 19. Over the past five years its average ratio was 23. Based only on this comparison, the analyst can best conclude that the shares are:

Key takeaways

Trailing = prior 12 months (EPS_t); forward = next 12 months (EPS_{t+1}); FY1 and FY2 use the next fiscal years; current = latest reported figures.
Current multiples carry one-time items, accounting choices and the cycle; check past and forward multiples too.
Own history shows trends, peer history shows relative performance; neither alone proves mispricing.
A terminal value = year-n fundamental × a multiple from mature peers, discounted n years. A whole peer group can be mispriced.

Trailing and forward P/E

\text{Trailing P/E} = \dfrac{P_t}{\text{EPS}_t}, \quad \text{Forward P/E} = \dfrac{P_t}{\text{EPS}_{t+1}}

Quick example

Price 54.00, trailing EPS 4.50 and consensus forward EPS 5.40: trailing P/E 12.0, forward P/E 10.0.

On your calculator

54÷4.5= 12.0
54÷5.4= 10.0

54ENTER4.5÷ 12.0
54ENTER5.4÷ 10.0

ENTER enter (on the HP, puts the number on the stack)

Present value with a terminal multiple

IV_0 = \sum_{t=1}^{n} \dfrac{E(CF_t)}{(1 + r)^t} + \dfrac{E(P_{t+n})}{(1 + r)^n}, \quad E(P_{t+n}) = \text{year-}n\text{ fundamental} \times \text{multiple}

Quick example

Cash flows of 10 in year 1 and 12 in year 2, a terminal multiple of 10 on the year-2 figure, required return 12%: 10 ÷ 1.12 + (12 + 120) ÷ 1.2544 = 114.16.

On your calculator

10÷1.12+(132÷1.2544)= 114.16

10ENTER1.12÷132ENTER1.2544÷+ 114.16

ENTER enter (on the HP, puts the number on the stack)

All Equities formulas, every lesson

Practice exam-style questions on Relative Valuation with Multiples

Next module: Financial Statement Forecasting Why build a disaggregated model, and at what level of detail

Questions about this lesson?

Where this comes back

From the forecast model to an equity value Financial Statement Forecasting
Why two analysts using the same model get different values Equity Research Reports

Questions candidates ask

What is the difference between trailing and forward P/E?

Trailing P/E divides the price by EPS for the last four quarters; forward P/E divides it by analysts' consensus EPS for the next 12 months. With growing earnings the forward P/E is lower.

Can a stock be undervalued because its P/E is below its historical average?

Not on that evidence alone. The company, its strategy or its peers may have changed. Compare with peers and fundamentals before calling it cheap.

How do you use a multiple to estimate terminal value?

Multiply the forecast's final-year earnings or cash flow by a multiple from mature peers the company should resemble then, and discount it to today over the full forecast period.

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