What Is Forward Price-to-Earnings (Forward P/E)?

What Is Forward Price-to-Earnings (Forward P/E)?

Let me explain forward price-to-earnings (P/E) to you: it uses forecasted earnings to evaluate a company's future value, giving you key insights even though estimates can vary. You need to understand that forward P/E changes by industry, influenced by growth rates and risk profiles.

For instance, regional banks with stable earnings often have a forward P/E around 16, while the innovative healthcare sector can reach as high as 133. Grasping these differences helps you predict stock price changes based on earnings forecasts.

Analyzing the Forward P/E Ratio: What You Need to Know

The forecasted earnings in the forward P/E formula are usually for the next 12 months or fiscal year. You can compare it directly with the trailing P/E ratio.

Here's the formula: Forward P/E = Current Share Price / Estimated Future Earnings per Share.

Take this example: a company with a $50 share price and $5 EPS this year, with analysts estimating 10% growth next year. The current P/E is 10, but forward P/E is $50 / ($5 x 1.10) = 9.1x. Notice how forward P/E is lower, accounting for growth.

In a real case, Apple's stock at $233 has a forward P/E of 34.57, based on expected $6.74 EPS, showing how it reflects future performance expectations.

Insights Gained From Forward P/E Ratios

Analysts see the P/E as a price on earnings for valuing companies. Ideally, $1 of earnings should be worth the same everywhere, but it isn't in practice.

If Company A trades at $5 and Company B at $10, the market values B's earnings higher—maybe due to overvaluation or better management.

Trailing P/E uses past 12 months' earnings with today's price, while forward P/E projects with estimates. For Company B at $10 with earnings doubling to $2, forward P/E is 5x, signaling expected growth if lower than current P/E, or decline if higher.

Comparing Forward P/E and Trailing P/E Ratios

Forward P/E relies on projections, trailing on past EPS over 12 months. Trailing is popular for its accuracy assumption, and some prefer it over forecasts they distrust.

But trailing P/E isn't perfect—past results don't predict future, and static EPS ignores price fluctuations from events. You might gain more by focusing on future earnings potential.

Recognizing the Drawbacks of Forward P/E Ratios

Since it depends on estimates, forward P/E can be biased or wrong—companies might manipulate guidance, and analyst vs. company estimates differ.

That's why studies find trailing P/E more reliable for predictions. If forward P/E drives your thesis, research deeply and watch for guidance changes. Use both ratios for reliability.

Step-by-Step Guide to Calculating Forward P/E in Excel

You can compute forward P/E in Excel by dividing market price per share by expected EPS.

Set up like this: Widen columns A, B, C to 30. Put company names in B1 and C1. Enter 'Market price per share' in A2, values in B2/C2. 'Forward earnings per share' in A3, values in B3/C3. 'Forward price to earnings ratio' in A4.

For Company ABC at $50 with $2.60 EPS: Enter name in B1, =50 in B2, =2.6 in B3, =B2/B3 in B4 for 19.23.

For Company DEF at $30 with $1.80 EPS: Name in C1, =30 in C2, =1.80 in C3, =C2/C3 in C4 for 16.67.

Why Might a Forward P/E Ratio Be Higher Than P/E?

A higher forward P/E than current means analysts expect earnings to drop, though estimates can revise and aren't always accurate.

Why Do Forward P/E Ratios Vary By Sector?

They vary due to sector differences in growth, risks, and capital. Tech often has high forward P/E from expected rapid growth, while utilities have lower from slow potential.

What Is Considered a Good Forward P/E?

No universal good forward P/E—it depends on industry. A lower one might signal undervaluation relative to future earnings.

The Bottom Line

Forward P/E gives you a view of future earnings vs. current price, useful for assessing investments, but consider estimate biases. Combine with trailing P/E and metrics like PEG or book value for robust analysis. Seek professional advice for confident decisions.