Forward P/E Ratio

The forward P/E looks ahead instead of back. While the standard trailing P/E uses actual earnings over the past year, the forward P/E uses expected earnings, usually the average or consensus estimate of the analysts who follow the company.

Example: a stock trades at $90. It earned $3 per share last year, so its trailing P/E is 30. Analysts expect earnings of $4.50 next year, so its forward P/E is 20.

The forward P/E is useful for companies whose earnings are changing quickly, because last year's results may not reflect where the business is headed. It is also commonly used to value whole markets, such as the S&P 500.

The weakness is that forecasts can be wrong. Analysts may be too optimistic or too pessimistic, and estimates change as new information arrives. A low forward P/E based on rosy estimates can be misleading. Different data providers may also use different time frames, such as the next fiscal year or the next four quarters.

Comparing the forward and trailing P/E shows whether analysts expect earnings to grow: a forward P/E well below the trailing P/E implies expected growth.