Forward P/E.
In plain English
Forward P/E takes today's share price and divides it by expected earnings per share over the next twelve months, usually the consensus of analyst estimates. It answers a different question than trailing P/E: what are buyers paying for the profit that is expected to arrive. Because the denominator is a forecast, the multiple moves whenever estimates are revised, even if the price never budges. Estimates tend to start optimistic and drift down as the year unfolds. That drift is why a stock can look cheap on forward earnings and expensive in hindsight.
01Why it matters
Every forward multiple carries someone else's forecast inside it, so a stock that screens as cheap may only be cheap if those estimates hold up.
02The math, step by step
A share trades at $80 and analysts expect $5.00 of earnings per share next year. $80 divided by $5.00 is a forward P/E of 16. If estimates are cut to $4.00 and the price does not move, the same stock now trades at 20 times forward earnings.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Trailing P/E uses earnings the company has already reported and cannot change retroactively. Forward P/E uses an estimate that gets revised constantly. Comparing one company's forward multiple to another's trailing multiple is not a comparison at all.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice