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3 min readTapeboard StaffEdited by Marcus Reilly

What is the Forward P/E Ratio? Definition, Formula, and Example

The forward P/E ratio is a valuation multiple equal to a stock's current share price divided by the consensus estimate of its earnings per share over the next twelve months or next fiscal year.

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What Is the Forward P/E Ratio?

The forward price-to-earnings ratio divides today's share price by the earnings per share analysts expect the company to earn in the future, usually over the next twelve months (NTM) or the next full fiscal year. The standard P/E ratio looks backward at reported earnings. The forward P/E looks ahead. Because stock prices discount future cash flows, most institutional desks quote valuation on a forward basis. When a strategist says "the S&P 500 trades at 22 times earnings," they mean forward earnings.

How the Forward P/E Is Calculated

Forward P/E = Current Share Price / Estimated Forward EPS

Forward EPS comes in two common flavors:

  • Next fiscal year (FY1 or FY2): the consensus estimate for a specific upcoming fiscal year.
  • Next twelve months (NTM): a time-weighted blend of the current and next fiscal year estimates. If a company is four months into its fiscal year, NTM EPS = (8/12 x FY1 estimate) + (4/12 x FY2 estimate). NTM rolls forward smoothly and avoids the jump that occurs when FY1 rolls over to a new year.

Trailing P/E uses reported earnings per share from the last four quarters, as filed with the SEC. Forward P/E has no filing behind it. It is built from analyst estimates.

Worked Example: AAPL

Illustrative figures for AAPL:

  • Share price: $250
  • Trailing twelve-month diluted EPS: $7.40
  • Next-twelve-month consensus EPS: $8.20

Trailing P/E = $250 / $7.40 = 33.8x

Forward P/E = $250 / $8.20 = 30.5x

The forward multiple is lower because the market expects earnings to grow about 10.8% ($8.20 / $7.40 - 1). The gap between trailing and forward P/E is a direct readout of expected growth. A stock with a trailing P/E of 60x and a forward P/E of 25x is priced for earnings to more than double. A stock whose forward P/E is higher than its trailing P/E is expected to earn less next year.

When Traders Use the Forward P/E

  • Growth-adjusted comparisons. Dividing forward P/E by the expected growth rate gives the PEG ratio, the standard check on whether a high multiple is justified.
  • Index-level valuation. Strategists compare the S&P 500 forward P/E to its 10- and 20-year averages to judge whether the market is rich or cheap relative to history.
  • Earnings-season repricing. When a company guides above consensus, estimates rise and the forward P/E falls at an unchanged price. Stocks that rally after a beat-and-raise frequently end the week at the same forward multiple, just on a bigger earnings base.
  • Cyclical turns. At a cycle trough, trailing P/E is inflated or negative while forward P/E reflects the recovery the market is already pricing in.

Screen for compressed forward multiples against peers in the live scanner.

Limitations and Common Misconceptions

  • Estimates are not earnings. Consensus forecasts are revised constantly and carry a documented optimism bias. Full-year estimates set 12 months out are, on average, revised downward by the time the year is reported.
  • A low forward P/E is a forecast of a low P/E. If estimates are cut 30%, a "cheap" 12x forward multiple becomes 17x at the same price. Value traps show low forward P/Es right up until the guidance cut.
  • Adjusted versus GAAP. Most consensus estimates are on an adjusted basis that excludes stock-based compensation and one-time charges. Comparing an adjusted forward P/E to a GAAP trailing P/E overstates expected growth.
  • Thin coverage. Small caps with one or two covering analysts produce forward P/Es built on a single estimate. Treat these as low-confidence figures.