What is the forward P/E ratio?

The forward price-to-earnings (P/E) ratio is a projected P/E ratio. The standard P/E ratio is calculated by dividing the stock price per share by the earnings from the previous year. A listed company generally has a P/E ratio unless it's unprofitable.

The forward P/E ratio differs from the standard P/E ratio in that it is not based on historical earnings. Analysts calculate the forward P/E by estimating what the company's earnings will be in the future. This should often be taken with a pinch of salt as it might be subject to the analyst's bias. Some companies also offer guidance on future revenues and earnings in their quarterly reports.

Forward P/E ratio
Examples of a good forward P/E ratio

So then what is a good forward P/E? It depends on a variety of factors and there's no magic formula to determine one.

Tesla had an excessively high P/E of 1101.16 in April 2021. However, it’s expected to drop to 244.7 in 2022 due to an increase in its earnings. In this case, the P/E dropping significantly means analysts expect the Tesla stock to do well in the future due to popular innovation.

However, a variety of factors go into understanding the forward P/E, which are further explained in our article on how to use the price-earnings ratio when investing

Another thing to beware of is that different industries have different average numbers. A quick comparison shows that software companies have a high average P/E of 49.63, while oil and gas sit at 16.98 as of writing.

Overall, the forward P/E ratio is a helpful tool to gauge whether you should invest in a particular company based on analyst and market expectations regarding the company’s business performance. Remember, a forward P/E is neither perfect nor set in stone as unforeseen circumstances can cause massive disruptions or upturns for any business.

Author of this article

Jake Asmah

Author of this article

Jake has a year of experience working in freelancing and content writing. Currently, he studies Sociology learning to understand people, as he improves upon his writing craft. Living in Hungary has given him much experience he will take to the world.

Jake Asmah

Intern Content Editor

Jake has a year of experience working in freelancing and content writing. Currently, he studies Sociology learning to understand people, as he improves upon his writing craft. Living in Hungary has given him much experience he will take to the world.

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