Stock analysts calculate a forward price-to-earnings ratio, or forward P/E, by dividing a stock's current price by estimated future earnings per share.
Some forward P/Es are calculated based on estimated earnings for the next four quarters. Others use actual earnings from the past two quarters with estimated earnings for the next two.
A forward P/E may help you evaluate the current price of a stock in relation to what you can reasonably expect to happen in the near future. In contrast, a trailing P/E is based exclusively on past performance.
For example, a stock whose price seems high in relation to the last year's earnings may seem more reasonably priced if earnings estimates are higher for the next year. On the other hand, the expectation of lower future earnings may make the current price higher than you are willing to pay.
- Browse Related Terms: Alpha, Book value, Dividend yield, Earnings estimate, Earnings momentum, Earnings surprise, Forward price-to-earnings ratio, Multiple, Outstanding shares, Price-to-book ratio, Price-to-earnings ratio (P/E), Price-to-sales ratio, Quarter, risk ratio, Special situation, Undervaluation, valuation, Value stock, Whisper number, Zacks Investment Research