Forward p/e

A multiple using forecast earnings for the year ahead. More relevant to value than the trailing version, and only as reliable as the forecast underneath it.

Where you will meet it

Forward p/e appears in 7 learning outcomes on the CFA syllabus. A few of them:

• Work out the price-to-earnings ratio and explain what it means
  CFA Level I · Equity Investments

  “Trailing P/E uses reported earnings and is factual but backward-looking; forward P/E uses a forecast and is relevant but only as good as the forecast.”

• Work out PVGO (the present value of what future growth opportunities are worth) and the share of the leading P/E it accounts for, and explain both
  CFA Level II · Equities

  “Dividing by E1 splits the leading P/E into 1 ÷ r, the no-growth multiple, plus PVGO ÷ E1, the part owed to growth opportunities.”

• Tell apart valuation by comparables and valuation by forecasted fundamentals
  CFA Level I · Equity Investments

  “The method of forecasted fundamentals instead derives the multiple a firm should command from its own expected growth, payout and required return, for example a justified forward P/E of payout ratio / (r - g).”

• Choose comparable peers and tell trailing multiples apart from forward ones
  CFA Level I · Equity Investments

  “Forward multiples use forecasts and are more relevant but only as good as the forecast.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with F · Glossary