DEFINITION of 'Forward Earnings'

Forward earnings are an estimate of a next period's earnings of a company, usually to completion of the current fiscal year and sometimes of the following fiscal year. Forward earnings are modeled by analysts, often with the assistance of "guidance" by management, which will project near-term revenues, margins, tax rates and other financial data for investors under safe harbor statements.

BREAKING DOWN 'Forward Earnings'

Forward earnings are of interest to investors because stock prices are supposed to reflect future earnings prospects discounted to the present. Historical earnings (last period or trailing twelve months) provide different amounts of information depending on the nature of the firm and industry, the position in the business cycle, and the state of the economy. For example, a large consumer staples company that recently experienced 4% earnings per share (EPS) growth in a global economy that grew 3% would be amenable to relatively accurate forward earnings estimates. A mid-cap technology company providing cloud infrastructure services in a fast-changing industry does not lend itself to consistently reliable forward earnings estimates.

If company management provides earnings guidance, it is used as a starting point for an analyst to model a forward EPS. It is assumed that management is in the best position to assess its future prospects. In most cases, management gives guidance for the current fiscal year and updates that guidance every quarter or when a material change in its evaluation forces it to update investors intra-quarter. Sometimes management will provide a longer-term view of its reasonable expectations for sales growth, margins, free cash flow growth, etc. Analysts who cover the companies then will model the financials, applying their own assumptions and perhaps tweaking management guidance (e.g., incrementally higher or lower operating margins), to produce forward valuation metrics such as forward price-to-earnings (P/E), forward price-to-sales (P/S) or forward enterprise value-to-ebitda (EV/EBITDA), to name a few. These valuation metrics can be useful to investors as long as they are cognizant about the odds of accuracy with respect to the type of company subject to analysis, as alluded to previously.

RELATED TERMS
  1. Forward Market

    A forward market is an over-the-counter marketplace that sets ...
  2. Earnings Estimate

    An earnings estimate is an analyst's estimate for a company's ...
  3. Forward Guidance

    Forward guidance are verbal assurances from a country’s central ...
  4. Outright Forward

    A forward currency contract with a locked-in exchange rate and ...
  5. Forward Rate

    A forward rate is an interest rate applicable to a financial ...
  6. Forward Premium

    A forward premium occurs when the expected future price of a ...
Related Articles
  1. Investing

    Earnings Guidance: Can It Predict the Future?

    Explore the controversies surrounding companies commenting on their forward-looking expectations.
  2. Investing

    Explaining Forward Price-to-Earnings Ratio

    The estimated P/E of a company is often used to compare current earnings to estimated future earnings.
  3. Insights

    Earnings Forecasts: A Primer

    Learn how this key metric is calculated and how it is used to judge market performance.
  4. Investing

    The Flow of Company Information

    Learn how to gather all the pieces before you start to put together your puzzle.
  5. Insights

    5 Consumer Staple Stocks Vulnerable To a Sell Off (GIS, CAG)

    Thinking about investing for dividend yield? Here is a consumer staples stock list of companies that could potentially sell off.
  6. Investing

    4 Cases When Companies May Deserve a Higher P/E Ratio (AMZN, ZBH)

    Find out why the price-to-earnings ratio is high for some companies. Learn about the impact of growth rates, acquisition speculation and non-recurring charges.
  7. Trading

    Stock Analysis Basics: How To Forecast Revenue and Growth

    Forecasted revenue and growth projections are important components of security analysis, leading to a stock’s future worth.
  8. Investing

    S&P Valuations Nearing Tech-Bubble Levels (AAPL)

    The S&P's median forward P/E is just 14% from its 2001 peak.
  9. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  10. Trading

    Value-Priced Stocks to Watch in 2016 (AMBC, VIPS)

    In terms of P/E and Forward P/E these stocks are trading at low valuations. Watch these technical price levels for buying opportunities in 2016.
RELATED FAQS
  1. What are the best uses for trailing EPS, current EPS and forward EPS?

    The earnings per share (EPS) indicator has three basic types that can alert you to past, present and future health of a company. Read Answer >>
  2. Why is the initial value of a forward contract set to zero?

    Discover why the initial value of a forward contract is set to zero; read about financial mathematics and exchange logic ... Read Answer >>
  3. How accurate is the forward rate in predicting interest rates?

    Find out why forward rates are inconsistent and limited predictors of actual future interest rates, primarily because the ... Read Answer >>
  4. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center