How to construct a forward-looking P/E ratio

When using price-to-earnings ratio to evaluate the long-term potential of a company, remember to also factor in a forward-looking P/E ratio

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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.

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