A powerful tool for evaluating growth companies: Forward PE

Forward PE (Forward Price-to-Earnings Ratio) is a method of calculating the P/E ratio based on expected earnings. It is calculated by dividing a company's market capitalization or stock price by the expected earnings per share (EPS) for the next year. The calculation formula is shown in Figure 1.

Here, the "expected earnings per share for the next year" is typically the average forecast of analysts for the company's earnings in the coming year.

According to data provided by Longbridge (Figure 2), the median EPS forecast for NVIDIA is 4.13 yuan, and the current stock price is 135.58 yuan, resulting in a Forward PE of 135.58/4.13=32.8.

This means investors are willing to pay 135.58 yuan for every 4.13 yuan of profit the company is expected to earn in the next year.

Forward PE differs from the traditional Trailing PE (Trailing Price-to-Earnings Ratio), which is based on the actual earnings of the past 12 months. Forward PE more reflects the market's expectations for the company's future profitability, thus helping investors assess the stock's value and growth potential. However, since Forward PE relies on forecasts, its accuracy is affected by the reliability of those predictions.

$NVIDIA(NVDA.US)