## 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.

$\text{Forward } P/E = \frac{\text{Current Share Price}}{\text{Estimated Future Earnings per Share}}$

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.