Forward P/E Ratio

Definition

The Forward Price to Earnings ratio analyzes the current stock price over analysts' estimated earnings per share. Investors  utilize the Forward Price to Earnings ratio to gauge whether expected earnings will decrease or increase in the next earnings period.  

Calculation

Forward PE Ratio =  current stock price/estimated earnings per share for next earnings period

example: Tesla's current stock price is at $950 and the predicted EPS is $30

$950/ $30 = Forward P/E of 31.67

This means that the stock is expected to trade at 31.67 times its price for the next earnings period.

Why is this important?

The Forward P/E ratio is important because it indicates to investors that a stock's expected earnings may increase or decrease when compared to the current P/E ratio. When the Forward P/E is greater than the current P/E, it indicates a decrease in expected earnings and vice versa.  

Financial Glossary Reference

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