The forward P/E calculates the price-to-earnings ratio that uses projected future earnings. The trailing P/E, which is the standard form of the price-to-earnings ratio, is calculated using recent past earnings.
When analysts talk about the P/E ratio, they commonly refer to the trailing P/E. It is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months. This measure is considered the most reliable since it is calculated based on a company's actual performance. However, it may be a faulty estimate since a company's performance and profits typically change over time.
The forward P/E ratio differs by projecting, or estimating, 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. Estimates used for the forward P/E ratio can come from either a company's earnings release or from analysts.
It can be helpful to investors to consider both calculations of the P/E ratio. If an investor has noted the forward P/E ratio from the previous year, he can check to see how accurate the previous year's estimated P/E was based on the current P/E. Forward P/E calculations are also helpful in comparing the likely future performance of similar companies in the same industry.