What Is Forward Price-to-Earnings (Forward P/E)?
Forward price-to-earnings (forward P/E) is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. While the earnings used in this formula are just an estimate and not as reliable as current or historical earnings data, there are still benefits to estimated P/E analysis.
Key Takeaways:
- Forward P/E is a version of the ratio of price-to-earnings that uses forecasted earnings for the P/E calculation.
- Because forward P/E uses estimated earnings per share (EPS), it may produce incorrect or biased results if actual earnings prove to be different.
- Analysts often combine forward and trailing P/E estimates to make a better judgment.
Understanding Forward Price-to-Earnings (Forward P/E)
The forecasted earnings used in the formula below are typically either projected earnings for the following 12 months or the next full-year fiscal (FY) period. The forward P/E can be contrasted with the trailing P/E ratio.
ForwardP/E=EstimatedFutureEarningsperShareCurrentSharePrice
For example, assume that a company has a current share price of $50 and this year’s earnings per share are $5. Analysts estimate that the company's earnings will grow by 10% over the next fiscal year. The company has a current P/E ratio of $50 / 5 = 10x.
The forward P/E, on the other hand, would be $50 / (5 x 1.10) = 9.1x. Note that the forward P/E is smaller than the current P/E since the forward P/E accounts for future earnings growth relative to today's share price.
What Does Forward Price-to-Earnings Reveal?
Analysts like to think of the P/E ratio as a price tag on earnings. It is used to calculate a relative value based on a company's level of earnings. In theory, $1 of earnings at company A is worth the same as $1 of earnings at company B. If this is the case, both companies should also be trading at the same price, but this is rarely the case.
If company A is trading for $5, and company B is trading for $10, this implies that the market values company B's earnings more. There can be various interpretations as to why company B is valued more.It could mean that company B's earnings are overvalued. It could also mean that company B deserves a premium on the value of its earnings due to superior management and a better business model.
When calculating the trailing P/E ratio, analysts compare today's price against earnings for the last 12 months or the last fiscal year. However, both are based on historical prices. Analysts use earnings estimates to determine what the relative value of the company will be at a future level of earnings. The forward P/E estimates the relative value of the earnings.
For example, if the current price of company B is $10, and earnings are estimated to double next year to $2, the forward P/E ratio is 5x, or half the value of the company when it made $1 in earnings. If the forward P/E ratio is lower than the current P/E ratio, this implies that analysts are expecting earnings to increase. If the forward P/E is higher than the current P/E ratio, analysts expect a decrease in earnings.
Forward P/E vs. Trailing P/E
Forward P/E uses projected EPS. Meanwhile, trailing P/E relies on past performance by dividing thecurrent share priceby the total EPS earnings over the past 12 months. Trailing P/E is the most popular P/E metric because it's the most objective—assuming the company reported earnings accurately. Some investors prefer to look at the trailing P/E because they don't trust another individual’searnings estimates.
However, trailing P/E also has its share of shortcomings—namely, a company’s past performance does not signal future behavior. Investors should thuscommit money based on futureearnings power, not the past. The fact that the EPS number remains constant while the stock prices fluctuate is also a problem. If a major company event drives the stock price significantly higher or lower, the trailing P/E will be less reflective of those changes.
Limitations of Forward P/E
Since forward P/E relies on estimated future earnings, it is subject to miscalculation and/or analysts' bias. There are other inherent problems with the forward P/E also. Companies could underestimate earnings to beat the consensus estimate P/E when the next quarter's earnings are announced.
Other companies may overstate the estimate and later adjust it going intotheir nextearnings announcement. Furthermore, external analysts may also provide estimates, which may diverge from the company estimates, creating confusion.
If you're using forward P/E as the central basis of yourinvestment thesis, research the companies thoroughly. If the company updates its guidance, this will affect the forward P/E in a way that might cause you to change your opinion. It is good practice to use both forward and trailing P/E to come to a more trustworthy figure.
How to Calculate Forward P/E in Excel
You can calculate a company's forward P/E for the next fiscal year in Microsoft Excel. As shown above, the formula for the forward P/E is simply a company's market price per share divided by its expected earnings per share. In Microsoft Excel, first increase the widths of columns A, B, and C by right-clicking on each of the columns and left-clicking on "Column Width" and change the value to 30.
Assume you wanted to compare the forward P/E ratio between two companies in the same sector. Enter the name of the first company into cell B1 and the name of the second company into cell C1. Then:
- Enter "Market price per share" into cell A2, and the corresponding values for the companies' market price per share into cells B2 and C2.
- Next, enter "Forward earningsper share" into cell A3, and the corresponding value for the companies' expected EPS for the next fiscal year into cells B3 and C3.
- Then, enter "Forward price to earnings ratio" into cell A4.
For example, assume company ABC is currently trading at $50 and has an expected EPS of $2.60. Enter "Company ABC" into cell B1. Next, enter "=50" into cell B2 and "=2.6" into cell B3. Then, enter "=B2/B3" into cell B4. The resulting forward P/E ratio for company ABC is 19.23.
On the other hand, company DEF currently has amarket valueper share of $30 and has an expected EPS of $1.80. Enter "Company DEF" into cell C1. Next, enter "=30" into cell C2 and "=1.80" into cell C3. Then, enter "=C2/C3" into cell C4. The resulting forward P/E for company DEF is 16.67.
FAQs
The forward P/E estimates the relative value of the earnings. For example, if the current price of company B is $10, and earnings are estimated to double next year to $2, the forward P/E ratio is 5x, or half the value of the company when it made $1 in earnings.
What does the price-to-earnings ratio PE tell you? ›
What is PE Ratio? Price to Earnings Ratio or Price to Earnings Multiple is the ratio of share price of a stock to its earnings per share (EPS). PE ratio is one of the most popular valuation metric of stocks. It provides indication whether a stock at its current market price is expensive or cheap.
How do you know if a PE ratio is good or bad for a company? ›
Share Price ÷ Earnings Per Share = P/E Ratio
You generally use the P/E ratio by comparing it to other P/E ratios of companies in the same industry or to past P/E ratios of the same company. If you are comparing same-sector companies, the one with the lower P/E may be undervalued.
Is a good PE ratio high or low? ›
The market average P/E ratio currently ranges from 20-25, so a higher PE above that could be considered bad, while a lower PE ratio could be considered better.
Is a negative forward PE good? ›
A low P/E indicates a stock's price is low compared to earnings and the company may be losing money. A consistently negative P/E ratio run the risk of bankruptcy.
Is it good if the PE ratio is high? ›
A high P/E ratio can be a good indicator of a company with good growth prospects. However, it is not enough to look at the P/E ratio alone. Ensure that you analyze the financials and fundamentals of the company and its competition to determine its growth prospects. This can help you make a more informed decision.
What is a good PE ratio and why? ›
The price-to-earnings ratio (P/E ratio) is a quick way to gauge whether a stock is undervalued or overvalued. All else equal, the lower the P/E ratio, the better the investment. For this reason, a P/E of less than 20x is “good” and anything higher than 30x is “bad”.
How do you know if a stock is overvalued? ›
The sales per share metric is calculated by dividing a company's 12-month sales by the number of outstanding shares. A low P/S ratio in comparison to peers could suggest some undervaluation. A high P/S ratio would suggest overvaluation.
What PE ratio does Warren Buffett use? ›
In order to determine whether he could pursue or ignore a company, Buffett would find the P/E and the book value. He would focus on a business with a P/E of 15 or lower.
Why is Amazon PE ratio so high? ›
34 One of the reasons Amazon's P/E is so much higher than Apple's is that its efforts to expand aggressively on a wide scale have helped keep earnings somewhat suppressed and the P/E ratio high. The P/E ratio should be used with a variety of other analysis tools to analyze a stock.
There's no specific number that indicates expensiveness, but, typically, stocks with P/E ratios of below 15 are considered cheap, while stocks above about 18 are thought of as expensive.
What is a good PE ratio negative? ›
What does negative pe ratio mean? A negative P/E ratio means that the company reported either no earnings per share (EPS) or negative EPS. It often means the company made no money over the last 12 months.
What is the average PE ratio for the S&P 500? ›
The current S&P500 10-year P/E Ratio is 28.0. This is 39% above the modern-era market average of 19.6, putting the current P/E 0.9 standard deviations above the modern-era average. This suggests that the market is Fairly Valued. The below chart shows the historical trend of this ratio.
What stocks have the lowest PE ratio? ›
Low PE Ratio Stocks
| Company | Current Price | PE Ratio |
|---|
| ESEA Euroseas | $18.64 +5.1% | 1.24 |
| JFIN Jiayin Group | $2.81 +1.3% | 1.31 |
| NMM Navios Maritime Partners | $25.01 +1.0% | 1.33 |
| STG Sunlands Technology Group | $9.46 -0.6% | 1.37 |
27 more rowsThe forward PE ratio uses the forecasted earnings per share of the company over the next 12 months for calculating the price-earnings ratio. It is calculated by dividing price per share by forecasted earnings per share over the next 12 months.
What does it mean if forward PE is higher than trailing PE? ›
For example, if the forward P/E ratio is lower than the trailing P/E ratio, it may mean that analysts are expecting earnings to increase. If the forward P/E ratio is higher than the trailing P/E ratio, it may mean that analysts expect a decline in earnings.
Is forward or trailing PE better? ›
The forward P/E ratio is favored by analysts who believe that investment decisions are better made based on estimates of a company's future rather than past performance. Estimates used for the forward P/E ratio can come from either a company's earnings release or from analysts.
Why is a low PE ratio good? ›
A high P/E ratio might indicate that a stock's price is high relative to its earnings and potentially suggests that the stock is overvalued. On the other hand, a low P/E ratio might mean that a stock is undervalued.
Is a PE ratio of 30 good? ›
A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth. Once a company becomes more mature, it will grow more slowly and the P/E tends to decline.
Is 5 a good PE ratio? ›
It is arguable that a PE of five or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level.
Higher P/E stocks, in general, are considered more expensive; while lower P/E stocks are, in general, considered cheap. Over history, the average P/E ratio of the stock market has been around 15-17.
What PE is considered overvalued? ›
A PEG greater than 1 might be considered overvalued because it might indicate the stock price is too high compared to the company's expected earnings growth.
Is it better to buy undervalued or overvalued stocks? ›
When a stock is overvalued, it presents an opportunity to go “short” by selling its shares. When a stock is undervalued, it presents an opportunity to go “long” by buying its shares.
What to look for if a stock is undervalued? ›
Look at the company's price-to-earnings ratio and market cap. One way to find undervalued stocks is by looking at a stock's price-to-earnings ratio, also known as PE ratio. The PE ratio is calculated by dividing the company's stock price by its earnings per share.
What does a high forward PE mean? ›
The regular P/E ratio is a current stock price over its earnings per share. The forward P/E ratio is a current stock's price over its "predicted" earnings per share. If the forward P/E ratio is higher than the current P/E ratio, it indicates decreased expected earnings.
Why do we use forward PE? ›
The forward P/E ratio estimates a company's likely earnings per share for the next 12 months. The forward P/E ratio is favored by analysts who believe that investment decisions are better made based on estimates of a company's future rather than past performance.
What does it mean when forward PE is higher than trailing PE? ›
For example, if the forward P/E ratio is lower than the trailing P/E ratio, it may mean that analysts are expecting earnings to increase. If the forward P/E ratio is higher than the trailing P/E ratio, it may mean that analysts expect a decline in earnings.
What causes forward PE ratio to increase? ›
A combination of economic growth and low inflation could expand PE ratios as funds flow into stock markets in anticipation of strong earnings and dividend growth.
What does negative forward PE ratio mean? ›
What does negative pe ratio mean? A negative P/E ratio means that the company reported either no earnings per share (EPS) or negative EPS. It often means the company made no money over the last 12 months.
Who determines forward PE? ›
Analysts calculate the forward P/E by estimating what the company's earnings will be in the future. This should often be taken with a pinch of salt as it might be subject to the analyst's bias. Some companies also offer guidance on future revenues and earnings in their quarterly reports. 1.
Comparing Forward P/E and Trailing P/E
The key difference between forward P/E and trailing P/E is that the forward measurement is based on the next projected 12 months of earnings, while the trailing figure is based on the last 12 months of actual earnings.
What is Amazon's forward PE ratio? ›
Amazon.com's Forward PE Ratio for today is 44.64.
What is PayPal forward PE ratio? ›
The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure. PayPal Holdings PE ratio as of December 21, 2022 is 23.23. Please refer to the Stock Price Adjustment Guide for more information on our historical prices.
