Forward Earnings

Forward earnings are an estimate of a next period's earnings of a company, usually to completion of the current fiscal year and sometimes of the following fiscal year. Forward earnings are modeled by analysts, often with the assistance of "guidance" by management, which will project near-term revenues, margins, tax rates and other financial data for investors under safe harbor statements.

Forward earnings are of interest to investors because stock prices are supposed to reflect future earnings prospects discounted to the present. Historical earnings (last period or trailing twelve months) provide different amounts of information depending on the nature of the firm and industry, the position in the business cycle, and the state of the economy. For example, a large consumer staples company that recently experienced 4% earnings per share (EPS) growth in a global economy that grew 3% would lend itself to relatively accurate forward earnings estimates. A mid-cap technology company providing cloud infrastructure services in a fast-changing industry does not lend itself to consistently reliable forward earnings estimates.

If company management provides earnings guidance, it is used as a starting point for an analyst to model a forward EPS. It is assumed that management is in the best position to assess its future prospects. In most cases, management gives guidance for the current fiscal year and updates that guidance every quarter or when a material change in its evaluation forces it to update investors intra-quarter. Sometimes management will provide a longer-term view of its reasonable expectations for sales growth, margins, free cash flow growth, etc. Analysts who cover the companies then will model the financials, applying their own assumptions and perhaps tweaking management guidance (e.g., incrementally higher or lower operating margins), to produce forward valuation metrics such as forward price-to-earnings (P/E), forward price-to-sales (P/S) or forward enterprise value-to-EBITDA (EV/EBITDA), to name a few. These valuation metrics can be useful to investors as long as they are cognizant about the odds of accuracy with respect to the type of company subject to analysis, as alluded to previously.