The forward P/E ratio (known as forward earnings yield) is one of the most important factors that determine the value of a particular stock. It is a stock or company’s forecasted earnings per share over the next 12 months, divided by the current share price. In this article, you will find out everything you need to know about this stock valuation.
The forward P/E ratio is a measure of the price-to-earnings ratio using forecasted earnings to calculate the Price-to-earnings ratio. The difference between the forward price to earning ratio and the trailing price to earning ratio is that the latter uses actual earnings while the former uses estimated or forecasted earnings. The profits considered in this calculation are only estimates and not as accurate as actual or historical earnings data, but the data is still useful for some aspects.
To calculate the forward price to earnings ratio, divide the current stock price by the forecasted earnings per share (EPS) for the next 12 months.
For example, if a company’s stock is trading at $100 per share and analysts are forecasting EPS of $10 for the next 12 months, then the company’s forward price to earning ratio would be 10.
A high forward P/E ratio might indicate that investors are expecting higher growth in the company’s earnings. Conversely, a low forward price to earning ratio might indicate that investors are expecting lower growth or even a decline in the company’s earnings.
The forward P/E ratio isn’t perfect. Here are some cons: