Rolling EPS

What Is Rolling EPS?

Rolling EPS gives an annual earnings per share (EPS) estimate by consolidating EPS from the past two quarters with estimated EPS from the next two quarters.

It very well might be calculated with the accompanying formula:

^{Rolling EPS = (Net income from the previous two quarters + next two quarters - preferred dividends)/average shares outstanding}

Understanding Rolling EPS

Earnings per share (EPS), a company's profit divided by the amount of common stock it has in circulation, is one of the most closely observed metrics in investing. Other than serving as an indicator of how much money pulled in after accounting for all expenses was allotted to each share of common stock, it's likewise frequently used to determine in the event that a company is reasonably valued.

EPS is a key component of the price-to-earnings (P/E) valuation ratio. Divide the share price by EPS and you get a multiple denoting the amount we pay for $1 of a company's profit. In other words, on the off chance that a company is currently trading at a P/E of 20x that would mean a investor will pay $20 for $1 of current earnings.

The share price of a stock might look cheap, genuinely valued or expensive, depending on whether you check out at historical earnings or estimated future earnings.

Earnings forecasts are based on educated guesswork from analysts and are often too blushing, possibly making the valuation look cheap. Historical earnings, then again, are set in stone yet may not decently represent a company's legitimate growth potential. Rolling EPS represents a compromise, providing investors with a blend of both.

Example of Rolling EPS

ABC Corp. registered EPS of three dollars per share and two dollars per share, respectively, in its previous two quarters. Looking ahead, analysts are confident of an even brighter next six months, penciling in forecasts of five dollars per share for the next quarter, followed by seven dollars per share in the one after.

Based on ABC's historic and projected earnings, its rolling EPS is $17 (($3 + $2) + ($5 + $7) = $17). Presently if, say, ABC's shares were trading at $300, that would lead to a rolling P/E ratio of 18 times (300/17 = 17.6).

This P/E number means little in separation. However, when cross-referenced with the P/E multiples of other comparative companies, it could give us an idea of whether ABC's shares offer great value or not.

Rolling EPS versus Trailing EPS

Rolling EPS ought not be confused with trailing EPS, which fundamentally uses the previous four quarters of earnings in its calculation.

Sometimes you might hear or spot the term rolling trailing EPS, too. This means EPS will change as the latest earnings are added to the calculation and earnings from five quarters back are dropped to make way for them.

Special Considerations

Investors need to be careful with the EPS figures used to compute rolling EPS. Often, they can be distorted, both intentionally and unintentionally.

For instance, a company could register a one-time gain from a sale as operating income under generally accepted accounting principles (GAAP). Alternatively, it might treat a hefty operating expense as a unusual charge and exclude it from its EPS calculation.

Important

Be careful when utilizing reported EPS figures to calculate rolling EPS as they may be distorted and flatter the company's profit.

Ignore the numbers the corporate spin doctors believe you should fixate on and read the fine print. Further down in the financial statement you ought to find a more accurate EPS figure, together with the footnotes that reveal the practices and reporting policies of the company's accounting methods.

Features

• Earnings forecasts are often too ruddy, possibly making a company's shares look cheap.
• Rolling EPS represents a compromise, providing investors with a blend of both.
• Historical earnings, meanwhile, are set in stone yet may not decently represent a company's legitimate growth potential.
• Rolling EPS (earnings per share) gives an annual EPS estimate by consolidating EPS from the past two quarters with estimated EPS from the next two quarters.