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The forward price-to-earnings ratio is the same as the standard price-to-earnings ratio, but with projected earnings instead of prior earnings.Â  Just like the regular P/E ratio, the forward P/E ratio uses four quarters of earnings for the calculation.

The forward PE ratio is used to compare a companyâ€™s current P/E ratio with future projections. It can also be used to compare two different companies with a forward-looking focus.

The formula for the forward PE ratio is:

Market Price Per Share/Expected Earnings Per Share

Assume ABC Corporation has a market price of \$25 per share.Â  Its projected earnings for the next four quarters are \$125 million.Â  ABC has 100 million shares outstanding, resulting in expected earnings per share of \$1.25 per share.Â  Using the formula, ABCâ€™s forward P/E ratio is:

\$25 per share/\$1.25 expected earnings per share = 20

This P/E ratio can be compared to ABCâ€™s traditional P/E ratio to get a quick view of whether or not ABC is a good investment. If itâ€™s higher, it may indicate that ABC is a good investment.Â  Nevertheless, itâ€™s recommended that investors rely on more data than the forward P/E ratio alone.Â  One of the limitations of using the forward P/E ratio is that the estimation of expected earnings may be wrong. The forward P/E is best used with other financial analysis tools to create a more complete picture of a companyâ€™s potential.Â

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