What is a Forward PE Ratio
The Forward Price to Earnings (PE) Ratio is similar to the price to earnings ratio. 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.
Keep in mind, analyst estimates are not set in stone, and can often be wrong.
Forward PE = current stock price / predicted next annual earnings period
For instance, if the stock price for Apple is 600 dollars and the predicted EPS was 45, the predicted forward P/E would be 13.3.
The price-to-earnings ratio (P/E ratio) compares the share price of a company to the earnings it generates per share. The formula used to calculate this ratio simply divides the market value per share by the earnings per share (EPS). The typical calculation of the P/E ratio uses a company’s EPS from the last four quarters.
The significant difference between P/E Ratio and Leading, Forward or Projected P/E Ratio is the forward P/E is based on analyst speculation about a company’s future or forward earnings rather than historical data.
Earnings used in the forward P/E ratio are estimates of future earnings, while the standard P/E ratio uses actual earnings per share from the company’s previous four quarters. The forward P/E ratio can be seen to represent the market’s optimism for a company’s prospective growth.
Limitations of using forward P/E for investment analysis include a company inaccurately estimating expected earnings and model risk caused by programming or data errors.