The forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) earnings per share (EPS) of that company. For valuation purposes, a forward P/E ratio is typically considered more relevant than a historical P/E ratio.
The formula to calculate the forward P/E ratio is the same as the regular P/E ratio formula, however, estimated (or forecasted) earnings per share are used instead of historical figures.
Forward P/E formula:
= Current Share Price / Estimated Future Earnings per Share
For example, if a company has a current share price of $20 and next year’s EPS are expected to be $2.00, then the company has a forward P/E ratio of 10.0x.
The most challenging part of calculating the ratio is determining what the estimated future EPS of the company should be. The most common places to find estimates are:
For valuation purposes, analyst consensus Is the preferred method of determining future EPS. Analyst consensus represents the average (or “consensus”) of all the equity research analysts that cover a stock and submit their estimates to IBES on Bloomberg or another data set.
If you don’t have access to that information, you can typically find estimates for large cap stocks on sites like Google Finance and Yahoo Finance.
Since the stock market is forward looking (as opposed to backward) it places more emphasis on what is expected to happen in the future, rather than what happened in the past.
For this reason, more emphasis is typically placed on forward valuation multiples, rather than historical multiples.
Download our forward P/E ratio template to use your own numbers in Excel and perform a forward-looking valuation of companies. After downloading the template, input their current share prices and two years of futures EPS estimates and the P/E ratios will automatically be calculated.
Valuation multiples are just one of many ways to value a business. While multiples are fairly simplistic ways of assessing the worth of a company, financial modeling offers a much more detailed and intricate way to value the business.
While a multiple typically looks forward one to two years, a financial model forecasts out five years (most commonly) and then uses a terminal value and a discount rate to arrive at the net present value of the business.
Learn step by step in our online financial modeling courses and financial analyst training programs.
This has been an introductory guide to how financial analysts value companies using the forward price to earnings ratio or a company’s current share price to its estimated future EPS. To keep learning and developing your skills as an analyst, these additional resources will be a big help: