What is the forward Price-to-Earnings or forward P/E ratio?
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)Earnings Per Share Formula (EPS)The Earnings Per Share formula is a financial ratio, which counts net earnings against the total outstanding shares over a fixed period of time. A higher EPS ratio indicates a company’s ability to generate profits for common shareholders. of that company. For valuation purposesValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions. These methods of valuation are used in investment banking, equity research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and finance, a forward P/E ratio is typically considered more relevant than a historical P/E ratio.
What is the formula for the forward P/E ratio?
The formula to calculate the forward P/E ratio is the same as the regular P/E ratioPrice Earnings RatioThe Price Earnings Ratio (P/E Ratio) is the relationship between a company’s stock price and earnings per share. It gives investors a better sense of the value of a company. The P/E shows the expectations of the market and is the price you must pay per unit of current (or future) earnings 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.
Where to get the estimated EPS
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:
- Equity research reports
- Bloomberg
- Capital IQCapIQCapIQ (short for Capital IQ) is a market intelligence platform designed by Standard & Poor’s (S&P). The platform is widely used in many areas of corporate finance, including investment banking, equity research, asset management and more. The Capital IQ platform provides research, data, and analysis on private, public
- Google Finance
- Yahoo Finance
- Create your own estimate
For valuation purposes, analyst consensus Is the preferred method of determining future EPSEarnings Per Share Formula (EPS)The Earnings Per Share formula is a financial ratio, which counts net earnings against the total outstanding shares over a fixed period of time. A higher EPS ratio indicates a company’s ability to generate profits for common shareholders.. Analyst consensus represents the average (or “consensus”) of all the equity researchEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in. The Equity Research Division is a group of analysts and associates. This equity research overview guide analysts that cover a stock and submit their estimates to IBESIBES EstimatesIBES (also known as I/B/E/S) stands for Institutional Broker’s Estimate System, a database that was created by the Lynch, Jones, and Ryan brokerage. This system basically compiles the analysis and forecasted future earnings of publicly traded companies. With the help of this database, users can see the different predictions, along with the forecasts of analysts. 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.
Forward looking stock market
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 the forward P/E template
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.
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Other valuation methods
Valuation multiplesMultiples AnalysisMultiples analysis involves valuing a company with the use of a multiple. Multiples analysis compares the company’s multiple with that of a peer company or are just one of many ways to value a business. While multiples are fairly simplistic ways of assessing the worth of a company, financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and 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.
Additional resources
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:
- Private company valuationPrivate Company Valuation3 techniques for Private Company Valuation - learn how to value a business even if it's private and with limited information. This guide provides examples including comparable company analysis, discounted cash flow analysis, and the first Chicago method. Learn how professionals value a business
- DCF financial modelingDCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. DCF stands for Discounted Cash Flow, so the model is simply a forecast of a company’s unlevered free cash flow discounted back to today’s value. This free DCF model training guide will teach you the basics, step by step with examples and images
- Precedent transaction analysisPrecedent Transaction AnalysisPrecedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today. Commonly referred to as “precedents”, this method of valuation is used to value an entire business as part of a merger/acquisition commonly prepared by analysts
- Comparable company analysisComparable Company AnalysisHow to perform Comparable Company Analysis. This guide shows you step-by-step how to build comparable company analysis ("Comps"), includes a free template and many examples. Comps is a relative valuation methodology that looks at ratios of similar public companies and uses them to derive the value of another business
