Dear Nancy,
I am trying to get a clear explanation on the interpretation of the forward P/E to the current P/E. I get very vague explanations from my adviser and I need to understand how to read this.
As an example, we see the forward P/E of Suncor estimated to be 7.99 versus the current P/E at 10.65. Is that good or bad?
In general, what is a sign that the stock is a good buy (along with other factors, obviously): the forward P/E lower or higher than the actual P/E
Thanks in advance, Robert
Dear Robert,
The P/E, or price-to-earnings ratio, is one of many fundamental indicators used to help evaluate the value of a stock. It is calculated by dividing the price a stock trades for by the earnings per share of the past 12 months.
The forward P/E has the assumption that the stock price remains the same, and if the earnings is forecasted to increase, it therefore lowers the overall ratio.
In your example, the forward P/E of Suncor being 7.99 versus the current of 10.65 demonstrates a positive indicator for the company. This one positive sign is only a single financial piece of information that should be used in conjunction with many others to evaluate the value of a company's stock price and future expectation.
If the forward P/E was 12, for example, that is telling us that the future expected earnings are going to be lower than the current and therefore the value of the company should be lower than what it is now.
The P/E is sometimes referred to as the "multiple" and is an indicator of how much an investor is willing to pay per dollar of earnings.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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