The Forward Price-to-Earnings (P/E) ratio is a variation of the traditional P/E ratio, but it uses projected (or forward) earnings for the next 12 months instead of historical earnings. It is useful for evaluating a company’s valuation based on its future expected performance.

Here’s how you calculate the Forward P/E ratio:

Formula: Forward P/E = Current Share Price/ Projected Earnings Per Share (EPS) for the next 12 months

Find the Current Share Price:

Look up the current price of the company’s stock. This is the market price per share.

Find the Projected EPS (Earnings Per Share) for the Next 12 Months:

Analysts often provide estimates for a company’s earnings over the next 12 months (forward EPS). You can find this information in financial reports, earnings estimates, or analyst forecasts.

Apply the Formula:

Divide the current share price by the forward EPS to get the Forward P/E ratio.

Example:

Current Share Price = $100

Projected EPS for next 12 months = $5

Forward P/E = 100/5

=20

This means the company is expected to earn $5 per share in the next year, and the Forward P/E ratio is 20, indicating investors are willing to pay 20 times the projected earnings for the stock.

Why is Forward P/E useful?

The Forward P/E ratio gives investors an idea of how much they are paying for a company’s expected future earnings, rather than past performance, helping to assess whether the stock is overvalued or undervalued based on future growth projections.

Lauren Hua is a private client adviser at Fairmont Equities.

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