# Understanding Forward P/E: Forecasted Earnings' Role in Stock Valuation

![Forward Price-to-Earnings](https://www.investopedia.com/thmb/ege_Lr4JVPL3tnp2cfHoiEuOuuU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_ForwardPrice-to-Earnings-10870a56b1c74ec1beba56fa293dfca4.jpg)

*— Investopedia / Crea Taylor*

## What Is Forward Price-to-Earnings (Forward P/E)?

Forward [price-to-earnings](https://www.investopedia.com/terms/p/price-earningsratio.asp) (P/E) leverages forecasted earnings to assess a company's future value, providing investors with crucial insights despite potential variability in estimates. It is vital to recognize how forward P/E fluctuates by industry, driven by factors like growth rates and risk profiles.

For example, stable earnings in regional banks typically yield a forward P/E around 16, whereas the innovative healthcare sector sees forward P/Es as high as 133. Understanding these nuances can guide investors in anticipating stock price adjustments based on earnings forecasts.

### Key Takeaways:

*   Forward P/E uses forecasted earnings for its calculation, offering a glimpse into future earnings potential relative to the current stock price.
*   P/E ratios are critical for understanding a company's relative market value, but they can vary significantly across sectors due to different growth rates and risks.  
    
*   Analysts use both forward and trailing P/E ratios to provide a more comprehensive financial analysis of a company's performance and future outlook.  
    
*   The forward P/E ratio might be unreliable due to potential inaccuracies in earnings forecasts and analyst biases.  
    
*   Investors should balance forward P/E analysis with other financial metrics for a more accurate picture of a company's investment potential.

## Analyzing the Forward P/E Ratio: What You Need to Know

The forecasted earnings in the formula below are typically projected 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](https://www.investopedia.com/ask/answers/050115/what-difference-between-forward-pe-and-trailing-pe.asp).

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

For example, assume a company has a current share price of $50 and this year’s earnings per share (EPS) 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:

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](https://www.investopedia.com/ask/answers/050515/what-does-forward-pe-indicate-about-company.asp) growth relative to today's share price.

To illustrate this with a real example, Apple's (AAPL) stock has a forward P/E of 34.57. With the stock priced at $233, analysts expect Apple’s future annual earnings per share to be $6.74. This demonstrates how forward P/E ratios provide insight into expected future performance based on current market prices.

## Insights Gained From Forward P/E Ratios

Analysts view the P/E ratio as a price tag on earnings to assess a company's value. Ideally, $1 of earnings should have the same worth across companies, but in practice, it rarely does.

For instance, if Company A trades at $5 per share and Company B at $10 per share, the market values Company B's earnings more. This difference can be interpreted in various ways. For example, it might indicate that Company B's earnings are overvalued or that Company B's superior management and [business model](https://www.investopedia.com/terms/b/businessmodel.asp) warrant a higher valuation.

The [trailing P/E ratio](https://www.investopedia.com/terms/t/trailingpe.asp) uses today's price and earnings from the past 12 months or [fiscal year](https://www.investopedia.com/terms/f/fiscalyear.asp), reflecting historical data. In contrast, the forward P/E ratio uses earnings estimates to project the company's future value based on expected earnings.

For example, if the [current price](https://www.investopedia.com/terms/c/currentprice.asp) of Company B is $10, and earnings are expected to double to $2 next year, the forward P/E ratio would be 5x, indicating the company is valued at half its current P/E ratio. A lower forward P/E ratio compared to the current P/E suggests analysts expect earnings to increase. Conversely, a higher forward P/E ratio indicates expectations of declining earnings.

## Comparing Forward P/E and Trailing P/E Ratios

Forward P/E uses projected earnings, while trailing P/E uses past performance by dividing the [current price](https://www.investopedia.com/ask/answers/061615/how-companys-share-price-determined.asp) by EPS over the last 12 months. Trailing P/E is the most popular because it assumes accurate earnings reports. Some investors prefer it over forward P/E due to distrust of earnings forecasts.

However, trailing P/E has flaws, as past performance doesn't guarantee future results. Investors might benefit more from focusing on future [earnings power](https://www.investopedia.com/terms/e/earnings-power.asp) than past earnings. Another issue with trailing P/E is that the EPS number remains constant while stock prices fluctuate. If a significant event causes the stock price to rise or fall dramatically, the trailing P/E may not accurately reflect these changes.

## Recognizing the Drawbacks of Forward P/E Ratios

Because it relies on estimated future earnings, forward P/E can be miscalculated or biased. Companies might understate earnings to exceed estimates or overstate them and adjust later. Analyst estimates might differ from company ones, adding confusion.

That's one key reason forward P/E ratios are often cited as indicators of a stock's value, but studies show that trailing P/E ratios are more reliable for predicting future performance.

If forward P/E is central to your [investment thesis](https://www.investopedia.com/terms/i/investment-thesis.asp), research companies thoroughly. Changes in company guidance can significantly affect forward P/E and alter your perspective. Use both forward and trailing P/E for a more reliable assessment.

## Step-by-Step Guide to Calculating Forward P/E in Excel

You can calculate a company's forward P/E for the next fiscal year with Excel. Divide the company's market price per share by its expected earnings per share to get the forward P/E.

To set up your Excel sheet:

1.  Increase the widths of columns A, B, and C to 30 by right-clicking on each column, selecting "Column Width," and entering 30.
2.  In cell B1, enter the name of the first company; in cell C1, enter the name of the second company.
3.  In cell A2, enter "Market price per share," then input the market prices for the companies in cells B2 and C2.
4.  In cell A3, enter "Forward earnings per share," then input the expected EPS for the companies in cells B3 and C3.
5.  In cell A4, enter "Forward price to earnings ratio."

For example, assume that Company ABC is currently trading at $50 and has an expected EPS of $2.60:

*   Enter "Company ABC" into cell B1.
*   Enter "=50" into cell B2 and "=2.6" into cell B3.
*   Then, enter "=B2/B3" into cell B4. The resulting forward P/E ratio for company ABC is 19.23.

On the other hand, company DEF currently has a [market value](https://www.investopedia.com/terms/m/marketvalue.asp) per share of $30 and has an expected EPS of $1.80:

*   Enter "Company DEF" into cell C1.
*   Next, enter "=30" into cell C2 and "=1.80" into cell C3.
*   Then, enter "=C2/C3" into cell C4, resulting in a forward P/E ratio of 16.67.

## Why Might a Forward P/E Ratio Be Higher Than P/E?

If the forward P/E ratio is higher than the current P/E ratio, it indicates that analysts expect the company's earnings to decrease in the future. However, these estimates aren't always accurate and can be subject to revisions.

## Why Do Forward P/E Ratios Vary By Sector?

Forward P/E ratios tend to vary by sector due to differences in industry growth rates, risk profiles, and capital structures. The technology sector, for example, often has higher forward P/E ratios because investors anticipate rapid growth and significant future earnings in these industries. Sectors such as utilities often have lower forward P/E ratios since they're viewed as having slower growth potential.

## What Is Considered a Good Forward P/E?

There is no good forward P/E ratio as it varies by industry. However, a lower forward P/E ratio may indicate a stock is undervalued relative to its future earnings potential.

## The Bottom Line

The forward P/E ratio offers investors a glimpse into potential future earnings compared to current stock prices, serving as a valuable tool when assessing investment options. However, as it relies on analyst estimates, which may not always be accurate, one should consider its potential biases and limitations.

For a more robust analysis, investors are advised to incorporate both forward and trailing P/E ratios, alongside other financial metrics like the [PEG ratio](https://www.investopedia.com/terms/p/pegratio.asp) and book value. Maintaining a balanced approach to stock evaluation and seeking professional investment advice can lead to more informed and confident investment decisions.

> **Article Sources**
>
> 1.  NYU Stern. "[PE Ratio by Sector](https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html)."
>     
> 2.  Nasdaq. "[Apple Inc. Common Stock (AAPL) P/E & PEG Ratios](https://www.nasdaq.com/market-activity/stocks/aapl/price-earnings-peg-ratios)."
>     
> 3.  CFA Institute. "[Dumb Alpha: Trailing or Forward Earnings?](https://blogs.cfainstitute.org/investor/2016/07/12/dumb-alpha-trailing-or-forward-earnings/)"
>     
> 4.  Morningstar. "[PE Methods: Looking Back vs. Looking Ahead](https://www.morningstar.co.uk/uk/news/105416/p%2Fe-methods-looking-back-vs-looking-ahead.aspx)."