What is Forward PE Ratio?

There is only one difference between the company’s PE ratio and the forward PE ratio of the same firm. The difference is only the earnings that we use to calculate. In the PE ratio, we use the earnings of the previous year. However, we use the projected earnings for the next year in the forward PE.

Like the PE ratio, the forward PE ratio is also a great measure of whether a company is financially healthy. But every investor needs to look at a bunch of other financial ratios along with this forward ratio to conclude whether they should invest in a company.

Formula

As stated above, the formula of the forward price earning ratio is just an extension of the formula of the PE ratio.

Let us have a look at the formula below –

Forward PE Ratio = Market Price per Share / Projected Earnings per Share

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Here we need to consider two components.

  • The first component is the market price per share. As the market price (at which the potential shareholder would buy the company’s stocks) can change over time, the market price would vary. Therefore, we need to divide the market price by the number of outstanding shares of the company to determine the market price per share.The second component is the projected earnings per shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more. As an investor, you can look at different publications to learn about the projected earnings. Else, you can hire a financial analyst and take her help to find out an estimate.

We can calculate forward earnings per share using the following formula: –

Forward EPS = Projected Earnings / Numbers of Outstanding Shares of Company

This formula will also help investors know how much a company will earn per share. Then, they can use the same formula to find out about the forward PE ratio.

Examples

Let us take two examples of forward price to earnings ratioPrice To Earnings RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more. The first one would be simplistic, where it would give everything. The second example would be slightly complex.

Example # 1

Jill is new to stock investing. She wants to know whether she should invest in Burban Ltd., a biscuit company. So, she asks her brother, who has been in stock investment for quite a while. Jack, her brother, advises that she should look at many financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more. Jill figured out all the ratios except the forward price earning ratio. Help Jill find out the ratio using the following information: –

  • Total Market Price of the stock – $1 millionNumber of shares outstanding – 100,000Projected Earnings for the next year – $500,000

We will calculate the forward PE ratio by splitting the example into two parts.

First, we will calculate the market price per share, then find the forward EPS.

  • Market price per share = Total market price of the stock / Number of shares outstandingOr, Market price per share = $1,000,000 / 100,000 = $10 per share.

To find the forward EPS, we need to use the following formula:

  • Forward EPS = Projected Earnings for the next year / Number of shares outstandingOr, Forward EPS = $500,000 / 100,000 = $5 per share.

Using the forward price-to-earnings ratio formula, we will get –

  • Forward PE Ratio = Market price per share / Forward EPSForward PE Ratio = $10 / $5Forward PE Ratio = 2.

Example # 2

Mr. Amit wants to calculate the forward price earning ratio of Buddha Jeans Ltd. The issue is he does not have all the information. He only knows the PE ratio of the company and also the EPS. He also has a consensus report that says that the projected earnings of Buddha Jeans Ltd. would be $1 million in the coming year. Help Mr. Amit find out this ratio by using the following information: –

  • PE Ratio – 4.EPS – $15 per share.The number of outstanding shares – is 100,000.

We have been given the PE Ratio and EPS. So, let’s break them down.

  • PE Ratio = Market Price per Share / EPSWe know the PE Ratio is 4, and the EPS is $15 per share.

So, using the same information, we now get –

  • 4 = Market Price per Share / $15Or, Market Price per Share = 4 * $15 = $60 per share.

To find this ratio, we need to calculate the last information, i.e., forward EPS.

We will use the following formula to find out the forward EPS: –

  • Forward EPS = Projected Earnings / Number of Shares OutstandingForward EPS = $1 million / 100,000 Forward EPS = $10 per share.

We have all the information we need,

  • Forward Price Earning Ratio = $60 per share / $10 per shareForward Price Earning Ratio = 6.

  • Ratio (2018) = Current Price / EPS (2018) = 1,586.51/8.31 = 190.91xRatio (2019) = Current Price / EPS (2019) = 1,586.51/15.39 = 103.08x

Forward PE Calculator

You can use the following Forward PE calculator.

Forward PE Ratio in Excel

Let us now do the same example above in Excel. It is straightforward. First, we need to calculate the market price share and forward EPS, then calculate the ratio. You can easily calculate the ratio in the template provided.

We will calculate it by splitting the example into two parts.

Now, we use the formula we will get- 

Example #2

We have all the information we need to determine the forward PE ratio. 

You can download this Template here – Forward PE Ratio Excel Template.

Forward PE Ratio Video

This article is a guide to Forward PE Ratio. We discuss calculating the forward PE ratio and forward price earning valuation analysis, examples, and templates. You may also have a look at the following valuation articles to learn more: – 

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