What Is EV/EBITDA? Definition and Example
What the EV/EBITDA multiple measures, how to calculate enterprise value and EBITDA, and when it beats the P/E ratio for comparing companies.
GlossaryGlossary
What Is Forward P/E? Definition and Example
What the forward price-to-earnings ratio is, how it differs from trailing P/E, and why it is only as good as the estimate behind it.
Key takeaways
- Forward P/E is a stock’s price divided by analysts’ expected earnings per share for the next 12 months or next fiscal year.
- Trailing P/E uses the last 12 months of actual earnings. When earnings are expected to grow, forward P/E is lower than trailing P/E.
- Forward P/E rests on estimates, which are often revised and can be wrong, especially at turning points.
- It is most useful for comparing similar companies in the same industry at the same time.
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What is forward P/E?
Forward P/E tells you how many dollars investors pay today for one dollar of next year’s expected profit. It is the forward-looking version of the P/E ratio, built on the consensus analyst estimate instead of reported results.
How do you calculate forward P/E?
Forward P/E = current share price ÷ expected EPS for the next 12 months. Some data sources use the next fiscal year instead of the next 12 months, so check which one you are looking at before comparing.
Worked example
Illustrative: two companies, both priced at $100.
| Measure | Company A | Company B |
|---|---|---|
| Last 12 months EPS (actual) | $4.00 | $5.00 |
| Next 12 months EPS (estimate) | $5.00 | $5.10 |
| Trailing P/E | 25x | 20x |
| Forward P/E | 20x | 19.6x |
On trailing numbers A looks much pricier. On forward numbers they look similar, because A is expected to grow earnings 25% and B only 2%. Whether A deserves it depends on that 25% being right; the PEG ratio adds growth to the comparison.
Why it matters for a self‑directed investor
Forward P/E shows what expectations are already in the price. A high forward P/E means the market expects strong growth, and the stock can fall if growth merely meets a lower bar. Track estimate revisions: if the estimate drops, the forward P/E rises without the price moving. See how to evaluate a stock idea.
Common mistakes
- Treating the estimate as fact. Estimates can lag badly at turning points in the economy.
- Comparing forward P/E across very different industries.
- Calling a stock cheap on a low forward P/E when earnings are at a cyclical peak.
Frequently asked questions
Not by itself. A low forward P/E can mean a bargain, or that the market doubts the estimate or expects earnings to fall later.
Because analysts expect earnings to grow. Higher expected earnings in the denominator give a lower ratio.
Usually the consensus: the average of analysts’ earnings forecasts for the next 12 months or fiscal year.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.