Forward P/E

While the standard P/E ratio often uses past earnings, forward P/E looks ahead, using analysts' forecasts or the company's own guidance.

For example, if a share trades at 60, the company earned 4 per share last year and is expected to earn 5 per share next year, its trailing P/E is 15 but its forward P/E is 12. The lower forward figure reflects expected earnings growth.

Forward P/E is useful because share prices are driven by expectations about the future. It allows investors to compare companies based on what they are expected to earn, which can be especially helpful for businesses whose profits are changing quickly.

Its weakness is that it relies on forecasts, which can be wrong. Analysts' estimates are often too optimistic, and unexpected events can change earnings significantly. A company that misses its earnings forecast may turn out to have been more expensive than its forward P/E suggested. Investors often compare forward and trailing P/E ratios to understand how much growth is already expected.