What does "It's trading at 17 times forward earnings on 27% growth!" mean?

Question

Using hypothetical figures, elaborate on the above statement. What is forward earnings? What is growth? How would you mathematically determine forward earnings and growth in your estimation?

Answer 1

Every company makes earnings every year that is the Net Income or bottom line. Here you calculate the forward earings based on this years earnings and the expected growth rate of earnings.
That is if theis years earingis is 1Mn, and growth 5% then next years growth rate is 1(1+0.05). The year after that is 1(1+0.05)(1+0.05) thus you multiply by 1+0.05 for every year after that for 17 years. Each year you will get a number for example the next year the earnings is 1.05 mn and so. Now you discount each of these numbers by the return on equity and at the end of the 18 years you calculate the terminal value of the stock by the formula Dividend on 18the year divided by equity return or cost of equity - growth rate. This gives the expected price at the 17th year. You discount this at costo of equity along with the dividends which are calculated from earnings by multiplying earnings by payoutratio.
Price today=Earnings this year x payourt ratio/(1+cost of equity)+ Earnings second year x payour ratio/(1+cost of equity)^2+........+Earnings 17th year x payoutratio/(1+cost of equity)^17 + terminal value of price on 17 th year calculated as stated above. This will give the value of the company today dividing this by the number of shares outstanding will give the Market price of the share. This is called the dividend discount model.
Usually you will do this only for 5 years but for Infotech companies they do it for 17 and 25 years and the price tend to be higher for them. This must be what you are looking into.
So in your case the growth in 27 instead of 5 I had taken as example. Trading 17 times forward earnigns means they have taken 17 years earnings and discounted it to get the present day price instead of the usuall 5 years. The way I had calculated.

Answer 2

There are some variations on what I am about to describe, but this should give you the gist f it.

the "17 times fwd earnings" means that the current stock price is about 17 times next year's earnings per share. The 27% growth means that next years earning are expected to be 27% high than this year's earnings.

Fwd earnings can be deduced by manipulating the equation:
E*17=P where E is fwd earnings and P is current stock price.

Thus, E=P/17

E can be expressed as a function of the current year's earnings- i'll call it C.

E=(1+27%)*C.

Mathew:
The whole point about using a heuristic such as the PE multiple is that you don't have to do any forecasting or DCF calcualations. Further, the PE has nothing to do, at least directly, with the term of the forecasted period.