Understanding Forward PE (Price-to-Earnings) Ratio
Forward P/E uses the current price and forecasted earnings of the next four quarters for calculation. The share market is forward-looking, it is more about what is expected to happen in the future rather than what happened in the past. And this is the importance of this ratio. The analyst expects to decrease earnings if the forward PE ratio is higher than the current PE ratio. And the analyst expects to increase earnings if the forward PE ratio is lower than the current PE ratio.
The formula to derive Forward PE Ratio
Current Price -
It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as market value.
Expected EPS -
Expected EPS indicates the expected amount by a company to make in the next twelve months on a per share basis.
It is a measure of the company's profits available for the shareholders on a per-share basis and calculated by dividing the Net Income by Weighted Share Outstanding for the next 12 months. EPS is found in the company's Income Statement.
Example of Forward PE:
Coal India's expected EPS is Rs.22.42, and its current share price is Rs. 170.85.
The value as per the formula (Forward PE = Current Price / Expected EPS) is calculated as (170.85 / 22.42) = 7.62.
Forward PE is calculated as the current stock price divided by Expected EPS.
Forward PE relies on Expected EPS, and it is the expected amount by a company to make in the next twelve months on a per share basis.
For better analysis of the company, also check other financial metrics along with Forward PE like PE Ratio, PB Ratio, EPS, Trailing PE, etc.,
While looking at the Forward PE ratio, the following points should also take into consideration:
Forward PE is a variant of the PE ratio. The difference between the PE Ratio and Forward PE Ratio is that PE considered EPS of the financial year and Forward PE considered projected EPS.
Forward P/E is depend upon the estimated future earnings so, the calculation can be inaccurate.
Many investors use the Forward PE ratio to analyze the company's expected future earnings.
How to use the Forward PE ratio effectively
Forward PE relies on projected earnings, so there are chances of miscalculation. Thus many investors used forward PE with Trailing PE.
Forward PE is useful for evaluating different companies based on future projections.
The analyst expects to grow in the forward PE ratio if it is lower than PE Ratio.
For better analysis of the company, also check other financial metrics along with Forward PE like PE Ratio
, PB Ratio
, Trailing PE
||Screener at TSR
|| Strong Bullish
|12 to 15
|15 to 18
|| Mild Bullish
|18 to 21
|21 to 24
|| Mild Bearish
|24 to 27
|| Strong Bearish
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