Which version of the P/E ratio uses forecasted earnings for the next fiscal year?
Question
Which version of the P/E ratio uses forecasted earnings for the next fiscal year?
Solution
The version of the P/E ratio that uses forecasted earnings for the next fiscal year is known as the Forward P/E ratio. Here are the steps to understand it:
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P/E Ratio: The Price-to-Earnings (P/E) ratio is a financial metric that is widely used to measure the valuation of a company. It is calculated by dividing the market value per share by the earnings per share (EPS).
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Types of P/E Ratio: There are two types of P/E ratios - trailing P/E and forward P/E.
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Trailing P/E: The trailing P/E uses the earnings of the past 12 months and is calculated by dividing the current market price of the stock by the EPS over the past 12 months.
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Forward P/E: The forward P/E, on the other hand, uses forecasted earnings for the next fiscal year. It is calculated by dividing the current market price of the stock by the estimated EPS for the next fiscal year.
So, the version of the P/E ratio that uses forecasted earnings for the next fiscal year is the Forward P/E ratio.
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