forward multiples If we expect a company to have similar multiples to its peers we must have similar expectations for these companies in terms of growth returns and risk. But what if a company's growth rate is much higher than its peers for the next two years. Here's an example of alpha ink which is experiencing astronomical growth for the next two years and thereafter. It will grow at the same rate as peer companies. One way we can deal with this is to use forward multiples. Forward PE ratio compares the share price today with forecast eps. If instead of using PE ratios, we want to use EV multiples we would use the same approach by comparing today's EV with forecast ebit or ebitda. The table below shows the calculation of alpha incs forward PE multiples. Alpha inc's current share price is $20. If we divide this by the fy1 EPS figure of 1.3, we get an fy1 PE ratio of 15 times. If we divide the current share price by the fy2 EPS figure of 1.5 we get an fy2pe ratio of 13 times. When we look across our forward multiples a clear trend emerges. Multiples fall as earnings grow since the denominator is increasing but our numerator is constant. This is not a concerning trend. It's actually what we should expect for a company with growing earnings. In fact, the reduction in the multiple is a function of the growth rate earnings, which are growing more quickly will result in multiples, which fall more quickly as we look across the forecasts. Let's now compare Alpha inks forward multiples with those of peer companies. when we do this a further trend emerges Alpha inc's multiples converge with those of peer companies as their growth rates converge again. This shouldn't really be a surprise because we know that multiples reflect growth expectations companies with similar growth expectations will have similar multiples. We can use these trends to our advantage if we know that a company will have different growth rates appears in the near term or as experiencing a temporary contraction in earnings. We can put more Reliance on forward multiples that reflect earnings growth rates which are more similar to peers.