Continued from: Evaluating the long-term potential of a company
Constructing a forward-looking P/E ratio involves estimating a company’s future earnings and dividing it by the current stock price.
Here are the steps to calculate a forward-looking P/E ratio:
Estimate the company’s future earnings
To estimate the company’s future earnings, you can use financial analyst reports or company projections. These projections will give you an idea of how much money the company expects to earn in the future.
Determine the expected growth rate
Once you have an estimate of the company’s future earnings, you need to determine the expected growth rate. This rate can be based on historical growth rates, industry trends, or macroeconomic factors.
Calculate the future earnings per share
To calculate the future earnings per share (EPS), you need to divide the estimated future earnings by the number of shares outstanding.
Determine the current stock price
You can obtain the current stock price by looking it up on a financial website or through a brokerage account.
Calculate the forward-looking P/E ratio
Finally, divide the current stock price by the estimated future EPS to calculate the forward-looking P/E ratio.
It’s important to note that forward-looking P/E ratios are based on estimates and projections, so they may not accurately reflect future earnings or stock prices.
Therefore, it’s essential to take into account various factors and assumptions when interpreting forward-looking P/E ratios.