What Is a Forward P/E?

What Is a Forward P/E?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A forward P/E, or Price to Earnings ratio, is a valuation metric investors use to evaluate the future earnings potential of a company. By comparing the present market price of a stock to its expected earnings per share, the forward P/E provides a clearer picture of what investors are willing to pay for each dollar of the company’s future earnings. The lower the ratio, the less you pay for each unit of future earning, which could indicate a potentially undervalued stock. Conversely, a higher ratio could suggest that the stock may be overvalued.

Related Questions

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

The primary difference lies in the earnings used in the calculation. While the forward P/E uses projected future earnings, the trailing P/E uses the company’s earnings from the past 12 months. Thus, trailing P/E is based on historical data, while forward P/E is an estimate based on future predictions.

2. How is the forward P/E ratio calculated?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

To calculate the forward P/E, divide the current market price per share by the expected earnings per share over the next 12 months. This ratio is often provided by financial analysts who have forecasts for the company’s earnings.

3. Is a lower forward P/E always better?

Not necessarily. While a lower forward P/E might suggest a stock is undervalued, it could also indicate that analysts expect the company’s earnings to decrease. Similarly, a high forward P/E might suggest overvaluation, but it could also mean analysts are anticipating strong future earnings growth.

4. What does a negative forward P/E indicate?

A negative forward P/E can occur if a company is expected to post a loss in the upcoming period. It’s essential to understand why the company is projected to have negative earnings and whether this is a temporary situation or a symptom of long-term issues.

5. Is forward P/E useful for all types of companies?

While forward P/E can be a valuable tool, it’s more effective for companies with fairly predictable earnings. For firms in highly cyclical industries or startups expected to become profitable in the future, this metric might not be as informative.