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Going deeper · 5 min read

P/E in practice: comparing like with like

There are two versions. Trailing P/E uses the profit already earned; forward P/E uses next year's forecast. Forward is usually lower, because forecasts assume growth.

A number in isolation is useless. Compare it with the company's own five-year average, with direct competitors, and with the wider market.

The most useful reframing: a P/E of 40 says the market expects profits to grow substantially. Your job isn't to judge the number — it's to judge whether that expectation is reasonable.

Remember

A high P/E isn't a verdict, it's a forecast you can agree or disagree with.

See a real example

Compare Costco, Walmart and Target

Same shelves, three different multiples.

What this shows

The gap between these three is a gap in confidence about the next decade, not a gap in what they sell.

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