Forward PE ratio uses the forecasted earnings per share of the company over the period of next 12 months for calculating the price-earnings ratio and is calculated by dividing Price per share by forecasted earnings per share of the company over the period of next 12 months.
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 PE ratio, we use the earnings of the previous year. However, in the forward PE, we use the projected earnings for the next year.
Like the PE ratio, the forward PE is also a great measure of whether a company is financially healthy or not. But every investor needs to look at a bunch of other financial ratios along with this forward ratio to come to a conclusion that whether they should invest in a company or not.
Formula
As stated above, the formula of the forward price earning ratio is just an extension of the formula of the PE ratio.
Let’s have a look at the formula below –
Forward PE Ratio = Market Price per Share / Projected Earnings per Share
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For eg:
Source: Forward PE Ratio (wallstreetmojo.com)
Here we need to consider two components.
- The first component is the market price per share. As per the market price (at which the potential shareholder would buy the stocks of the company) can change over time, at different times, the market price would vary. We need to divide the market price by the number of outstanding shares of the company to find out 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 find out about the projected earnings. Or, you can hire a financial analyst and take her help to find out an estimate.
We can calculate Forward Earnings per Share by using the following formula –
Forward EPS = Projected Earnings / Numbers of Outstanding Shares of Company
Using 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
Now let’s 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 everything would be given. The second example would be a bit complex.
Example # 1
Jill is new in stock investing. She wants to know whether she should invest in Burban Ltd., a biscuit company. So she asks her brother, who is in stock investment for quite a while. Her brother, Jack, advises that she should look at a bunch of 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 by using the following information –
- Total Market Price of the stock – $1 million
- Number of shares outstanding – 100,000
- Projected 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, and then we will find out forward EPS.
- Market price per share = Total market price of the stock / Number of shares outstanding
- Or, Market price per share = $1,000,000 / 100,000 = $10 per share.
To find out the forward EPS, we need to use the formula.
- Forward EPS = Projected Earnings for the next year / Number of shares outstanding
- Or, Forward EPS = $500,000 / 100,000 = $5 per share.
Now, if we use the formula of the forward price earning ratio, we would get –
- Forward PE Ratio = Market price per share / Forward EPS
- = $10 / $5 = 2.
Example # 2
Mr. Amit wants to calculate the forward price earning ratio of Buddha Jeans Ltd. The issue is he doesn’t 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 – 100,000.
We have been given the PE Ratio and EPS. So, let’s break them down.
- PE Ratio = Market Price per Share / EPS
- We know that 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 / $15
- Or, Market Price per Share = 4 * $15 = $60 per share.
Now, to find out this ratio, we need to calculate the last piece of information, i.e., forward EPS.
To find out the forward EPS, we will use the following formula –
- Forward EPS = Projected Earnings / Number of Shares Outstanding
- Or, Forward EPS = $1 million / 100,000 = $10 per share.
Now, we have all the information we need-
- Forward Price Earning Ratio = $60 per share / $10 per share = 6.
Forward PE Ratio of Amazon
Amazon Current Share Price = 1,586.51 (as of 20th March, 2018)
Forward EPS (2018) of Amazon = $8.31
Forward EPS (2019) of Amazon = $15.39
- Ratio (2018) = Current Price / EPS (2018) = 1,586.51/8.31 = 190.91x
- Ratio (2019) = Current Price / EPS (2019) = 1,586.51/15.39 = 103.08x
Forward PE Calculator
You can use the following Forward PE Calculator.
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Forward PE Ratio in Excel
Let us now do the same example above in Excel. This is very simple. First, we need to calculate the market price share and forward EPS, and then we will 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, if we use the formula, we would get –
Example #2
Now, we have all the information we need to find out the forward PE ratio.
You can download this Template here – Forward PE Ratio Excel Template.
Forward PE Ratio Video
Recommended Articles
This article has been a guide to Forward PE Ratio. Here we discuss how to calculate forward price-earnings ratio and its use in valuation analysis along with practical examples and templates. You may also have a look at the following valuation articles to learn more –
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