- Valuation Basics
- Enterprise Value
- Enterprise Value Formula
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- Equity Value Formula
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- Market Capitalization Formula
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- Assessed Value vs Market Value
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- Value vs Growth Stocks
- Book Value Per share
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- Discounted Cash Flows
- Going Concern concept
- Dividend Discount Model (DDM)
- Gordon Growth Model
- Gordon Growth Model Formula
- Discounted Cash Flow Analysis (DCF)
- DCF Formula (Discounted Cash Flow)
- Free Cash Flow Formula (FCF)
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Terminal Value
- Terminal Value Formula
- Cost of Equity
- Cost of Equity Formula
- Risk-Free Rate
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- Beta in Finance
- Beta Formula
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- Calculate Beta Coefficient
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- Market Risk Premium Formula
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- Weighted Average Cost of Capital (WACC)
- Cost of Capital Formula
- WACC Formula
- Security Market Line (SML)
- Systematic Risk vs Unsystematic risk
- Free Cash Flow (FCF)
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- Mistakes in DCF
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- Cash Flow vs Free Cash Flow
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- Business Risk
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- Valuation Multiples
- Equity Value vs Enterprise Value
- Trading Multiples
- Comparable Company Analysis
- Transaction Multiples
- (Price Earning Ratio (P/E)
- PE Ratio formula
- PEG Ratio Formula
- Price to Cash Flow (P/CF)
- Price to Book Value Ratio (P/B)
- Price To Book Value formula
- Price Earning Growth Ratio (PEG)
- Trailing PE vs Forward PE
- Forward PE
- EV to EBITDA Multiple
- EV to EBIT Ratio
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- Other Valuation Tools
- Valuation Interview Prep
What is Forward PE Ratio?
There is only one difference between PE ratio of a company 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 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 the forward price earning ratio to come to the conclusion that whether they should invest in a company or not.
Forward PE Ratio Formula
As stated above, the formula of the forward price earning ratio is just an extension of the formula of PE ratio.
Let’s have a look at the formula below –
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 projected earnings per share. 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 –
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.
Forward PE Ratio Examples
Now let’s take two examples of forward price to earnings ratio. 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 ratios. 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
- Or, Forward Price Earning Ratio = $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 the forward price earning 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 the forward price earning 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 to find out the forward price earning ratio.
- Forward PE Ratio = Market price per share / Forward EPS
- Or, 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
- Forward Price Earning Ratio (2018) = Current Price / EPS (2018) = 1,586.51/8.31 = 190.91x
- Forward Price Earning Ratio (2019) = Current Price / EPS (2019) = 1,586.51/15.39 = 103.08x
Forward PE Ratio Calculator
You can use the following Forward PE Ratio Calculator.
|Forward PE Ratio Formula =||
Forward PE Ratio in Excel (with excel template)
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 forward PE ratio, by using the formula. 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 of the forward PE ratio, we would get –
Now, we have all the information we need to find out the forward PE ratio.
You can download this Forward PE Ratio Template here – Forward PE Ratio Excel Template
Foward PE Ratio Video
This has been a guide to Forward PE Ratio Formula, its uses along with practical examples. Here we also provide you with Forward Price Earnings Calculator with downloadable excel template. You may also have a look the following valuation articles to learn more –