Definition
Forward P/E uses consensus analyst estimates for the next 12 months of earnings, making it more forward-looking than trailing P/E. It is more relevant for growth companies where past earnings understate future potential. However, it relies on analyst estimates which can be overly optimistic or miss deteriorating fundamentals.
functions Formula
Forward P/E = Current Price / Estimated Future EPS
lightbulb Example
Stock trades at $80. Trailing EPS is $4 (trailing P/E = 20x) but analysts estimate $5 for next year. Forward P/E = 16x, suggesting the stock is cheaper on a forward basis.
verified_user Key Points
- More forward-looking than trailing P/E
- Relies on analyst estimates which can be wrong
- Useful for high-growth companies
- Compare forward P/E to growth rate via PEG ratio