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Glossary
Valuation

Forward P/E

The P/E using next year's forecast earnings instead of last year's actual ones.

Because investing is about the future, a forward P/E is arguably more relevant than a trailing one. It is also built on analyst forecasts, and analyst forecasts are systematically optimistic.

A forward P/E that is much lower than the trailing P/E is simply telling you that analysts expect earnings to jump. Your job is to decide whether they are right, not to take the lower number as a discount.

The formula
Forward P/E = Share price ÷ Forecast earnings per share
Figure

The order matters more than the maths

Do I understand how it makes money?1st
Does it actually make money?2nd
Will it survive a bad year?3rd
Is it cheap?last

Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.

Why it matters

It shows you the growth already priced in, which is the assumption you are actually being asked to buy.

The mistake everyone makes

Trusting the forecast. Check the company's history of hitting them.

Related terms

P/E ratio
How many years of current profit you are paying for the shares.
PEG ratio
The P/E adjusted for how fast earnings are growing.

See Forward P/E on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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