Final answer:
When the justified P/E is higher than the trailing P/E, it often indicates that the company may be undervalued, if the justified P/E is accurate in representing the company's expected growth and earnings.
Step-by-step explanation:
When evaluating a company's stock value, two commonly used metrics are the justified (fundamental) P/E ratio and the trailing P/E ratio.
The justified P/E reflects what the price-to-earnings ratio should be if the company is valued fairly based on its growth prospects, earnings, and risk, while the trailing P/E is based on past earnings. If the justified P/E is greater than the trailing P/E, it typically suggests that the company may be undervalued, assuming that the justified P/E accurately reflects the company's true growth potential and earnings prospects.