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How we calculate 'Rolling' Forecast Ratios
How we calculate 'Rolling' Forecast Ratios
Daniel Smith avatar
Written by Daniel Smith
Updated over a week ago

Every company in the market has a different reporting date for their year end. Unfortunately this means that ratios like the Price / Earnings Ratio based on historical or forecast data can be wildly inconsistent from company to company. One company reporting earnings next week could be on the same forecast PE Ratio as a company reporting earnings in 11 months time. Clearly it would be better to compare them on a like to like basis.

We have standardised certain Ratios for comparison purposes. In the case of the PE ratio, what we have done is create a rolling 1 year forecast earnings number which weights this year and next year's earnings forecasts depending on how far a company is through in its fiscal year. This puts every single company in the market on a comparable footing, allowing a like for like comparison across forecast valuation, growth and dividend variables. This is known as the 'rolling PE ratio'.

Worked ExampleAn example is always instructive. Imagine a company reports results on December 31st 2011 and announces 20p earnings. The broker forecasts 40p earnings for Dec 31st 2012. and 60p for 2013.

A quarter of the way through the year 2012 (e.g. end March)

  • the Rolling current Earnings will be 3/4 * 20 + 1/4 * 40 = 25p

  • the Forecast Rolling Earnings will be 3/4 * 40 + 1/4 * 60 = 45p As the year progresses, the numbers will get closer and closer to the forecast values.

Three quarters of the way through the year (e.g. end September)

  • the Rolling current Earnings will be 1/4 * 20 + 3/4 * 40 = 35p

  • the Forecast Rolling Earnings will be 1/4 * 40 + 3/4 * 60 = 55p Using Rolling values allows like for like comparison of ratios between companies with different reporting dates as otherwise you could be comparing a company's historic PE ratio who reported 11 months ago with a company who reported yesterday!

Other Variants

We also have the ‘Rolling 1 Year Forward' PE ratio or Dividend Yield, which follow the same principle but 12 months further on. In other words, it weights next year and the year after's earnings forecasts depending on where we are in the reporting cycle.

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