The forward P/E ratio can be calculated by :
Last transacted price per share divided by Earnings estimates of the company
The forward P/E is based on the prediction of earnings. If the forward P/E ratio is very low relative to its current P/E ratio, it may mean that the company is undervalued.
Company A is trading at a price of $20. In the last 12 months, its earnings per share was $2. Hence, the P/E ratio of company A based on the last 12 months EPS is 10. Going forward, wall street analysts expect the company to grow its earnings per share to $5. It’s forward P/E is thus $20 $5 = 4 . Previously, for every dollar of earnings, an investor would have to pay $10. Looking ahead, for every dollar of earnings, an investor pays $4. Hence, the company seems to be undervalued.