Investiční slovník
Term of the Month: Forward P/E (Expected P/E)
Key takeaways
- Forward P/E (expected P/E) compares the current share price with the estimated earnings per share for the next 12 months.
- Unlike trailing P/E (historic P/E), forward P/E works with forecasts — and forecasts can be wrong.
- A low forward P/E does not necessarily mean a cheap stock — it may signal overly optimistic earnings estimates.
- Forward P/E is a relative metric — it is only meaningful when compared with the historical average for a given market or sector.
- Analyst earnings estimates are available in databases such as Bloomberg or FactSet — for retail investors, consensus estimates are the data source.
Forward P/E, or expected P/E, is one of the most widely used valuation metrics in the world — and one of the most easily misread. It tells you how much you are paying today for every unit of earnings a company has yet to generate — typically over the next 12 months.
What Forward P/E Actually Means
The abbreviation P/E comes from price-to-earnings. Forward P/E calculates the ratio as follows:
- Numerator (P): the current market price of the share — a fact that can be verified in real time.
- Denominator (E): the estimated earnings per share (EPS) over the next 12 months — an analyst forecast, not a historical fact.
Example: a share trades at CZK 100 and analysts estimate earnings of CZK 5 per share — forward P/E is 20. This means the investor is paying 20× the estimated annual earnings. This approach differs from trailing P/E, which uses actual earnings from the past 12 months.
Why Estimates Matter
The key weakness of forward P/E is that the denominator is an estimate — and estimates are wrong. Analysts systematically overestimate future earnings, particularly in euphoric market conditions. If a company reports lower-than-expected earnings, the forward P/E retrospectively appears to have been understated, but was actually misleading at the time. It is therefore useful to track not only the forward P/E value but also the direction of estimate revisions — whether analysts are revising earnings up or down.
Forward P/E vs. Trailing P/E — When to Use Which
Trailing P/E is more precise because it uses actual numbers. Forward P/E is more relevant for assessing what the market is "pricing into the future" — what expectations are built into the current price. For cyclical companies (automakers or miners, for example) trailing P/E can be extremely high in a recession even though the company is valuationally attractive — forward P/E in such cases better reflects the normalised earnings power.
How to Read Forward P/E Correctly
- Always compare: A forward P/E of 18 is expensive for utilities, cheap for technology — sector context is crucial.
- Compare with history: Is the current valuation above or below the historical average for the given market or index?
- Track estimate revisions: Are analyst earnings forecasts rising or falling? Falling estimates at the same price mean forward P/E is rising even if the price has not moved.
- Do not use as a timing tool: An expensive market can stay expensive for years. Valuation says "what you're paying", not "when the price will fall".
Where to Find Forward P/E
For indices such as the S&P 500 or MSCI World, consensus forward P/E is published by Bloomberg, FactSet, or LSEG. Free sources include ETF provider websites or financial media. For valuation comparisons and market overviews, visit Hřivna projections or read about what the S&P 500 is and its valuations. Understanding valuations also helps when reading company analyses.
FAQ
What is the difference between forward P/E and Shiller's CAPE?
Shiller's CAPE (cyclically adjusted P/E) averages earnings over 10 years and adjusts for inflation — reducing cyclical distortions. Forward P/E looks only 12 months ahead. CAPE is better for long-term valuation comparisons; forward P/E reflects short-term market sentiment.
Can forward P/E be negative?
Yes — if analysts forecast a loss (negative EPS) over the next 12 months. A negative P/E is practically unusable as a comparative metric and is usually displayed as N/A or left blank.
How does forward P/E differ across markets?
Markets such as the US typically carry a higher forward P/E than emerging markets or Europe — this reflects higher return on equity, a larger share of technology, and lower political risk. Comparing forward P/E across different markets without context is misleading.