Rolling EPS: Definition, Calculation, and Examples
Summary:
Rolling EPS, or rolling earnings per share, is a financial metric that combines historical earnings with future earnings estimates to provide a comprehensive view of a company’s earnings potential. It offers investors a balanced perspective by blending past performance with forward-looking projections, aiding in the assessment of a company’s valuation and growth prospects. By considering both past and future earnings, rolling EPS helps investors make informed investment decisions.
What is rolling EPS?
Rolling EPS combines the EPS from the past two quarters with the estimated EPS for the next two quarters. This metric offers a blend of historical data and future projections, providing a more balanced view of a company’s earnings.
Formula for rolling EPS
The formula for calculating rolling EPS is straightforward:
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding
This calculation helps investors get a sense of annual earnings by considering both past performance and future expectations.
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding
This calculation helps investors get a sense of annual earnings by considering both past performance and future expectations.
A balanced perspective
Earnings forecasts can be overly optimistic, making a company’s shares seem undervalued. Conversely, historical earnings might not reflect a company’s growth potential. Rolling EPS provides a middle ground, blending both perspectives for a more accurate assessment.
Impact on valuation
EPS is a key component in valuation metrics like the price-to-earnings (P/E) ratio. Rolling EPS helps determine if a stock is fairly valued, overvalued, or undervalued by considering a mix of past performance and future potential.
Calculating rolling EPS: A step-by-step guide
Step 1: Gather historical EPS data
Collect the EPS figures for the past two quarters. This data provides the historical component of the rolling EPS.
Step 2: Obtain forecasted EPS data
Gather the estimated EPS for the next two quarters. Analysts typically provide these forecasts based on company guidance and market conditions.
Step 3: Calculate net income
Add the net income for the past two quarters and the estimated net income for the next two quarters.
Step 4: Adjust for preferred dividends
Subtract any preferred dividends from the net income. Preferred dividends are payments made to preferred shareholders and must be accounted for in the EPS calculation.
Step 5: Determine average shares outstanding
Calculate the average number of shares outstanding over the four-quarter period. This figure is used to divide the net income and determine the EPS.
Step 6: Compute rolling EPS
Use the formula to calculate the rolling EPS:
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding.
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding.
Example of rolling EPS
Let’s consider an example with ABC Corp. Suppose ABC Corp. reported an EPS of $3 per share and $2 per share in the past two quarters. Analysts forecast EPS of $5 per share and $7 per share for the next two quarters. Using the formula, we get:
Rolling EPS = ($3 + $2 + $5 + $7) = $17
If ABC Corp. shares trade at $300, the rolling P/E ratio is:
Rolling P/E = $300 / $17 ≈ 17.6
Rolling EPS = ($3 + $2 + $5 + $7) = $17
If ABC Corp. shares trade at $300, the rolling P/E ratio is:
Rolling P/E = $300 / $17 ≈ 17.6
This rolling P/E ratio can be compared with similar companies to assess ABC Corp.’s valuation.
Rolling EPS vs. trailing EPS
Understanding trailing EPS
Trailing EPS uses the EPS from the previous four quarters. It reflects the company’s past performance without considering future earnings estimates.
Pros and cons of rolling EPS
Comprehensive examples
Example 1: Tech innovators Inc.
Tech Innovators Inc. reported an EPS of $4 and $3 for the last two quarters. Analysts project an EPS of $6 and $8 for the next two quarters. Using these figures, we can calculate the rolling EPS as follows:
If Tech Innovators Inc.’s shares trade at $420, the rolling P/E ratio is:
This rolling P/E ratio helps investors compare Tech Innovators Inc. with its industry peers, assessing whether the stock offers good value.
Example 2: Green energy solutions
Green Energy Solutions reported an EPS of $5 and $4 for the last two quarters. The estimated EPS for the next two quarters is $7 and $9. Using these figures, the rolling EPS is:
If Green Energy Solutions’ shares trade at $500, the rolling P/E ratio is:
This calculation helps investors understand the company’s current valuation in comparison to other companies in the green energy sector.
How to interpret rolling EPS
Interpreting rolling EPS involves comparing it with industry benchmarks and historical data. A higher rolling EPS suggests stronger future performance, while a lower rolling EPS could indicate potential issues. Investors should consider the context of the industry, the company’s growth strategies, and external market conditions when interpreting rolling EPS.
Common pitfalls in using rolling EPS
While rolling EPS is a useful metric, it has potential pitfalls. Over-reliance on forecasted earnings can mislead investors, especially if analysts’ estimates are overly optimistic. Additionally, companies might manipulate earnings figures to present a better financial picture. Investors must critically analyze the
data, look beyond the reported figures, and consider the broader financial context to avoid these pitfalls.
data, look beyond the reported figures, and consider the broader financial context to avoid these pitfalls.
Conclusion
Rolling EPS is a valuable tool for investors seeking a comprehensive view of a company’s earnings. By combining historical data with future projections, it offers a balanced perspective that can aid in making informed investment decisions. However, it is essential to verify the accuracy of EPS figures and be aware of potential manipulations. By understanding and utilizing rolling EPS, investors can better assess the value and performance of their investments.
Frequently asked questions
What factors can affect the accuracy of rolling EPS?
Various factors can impact the accuracy of rolling EPS, including the reliability of earnings forecasts, changes in market conditions, and unexpected events affecting the company’s performance.
How often should investors review rolling EPS?
Investors should regularly review rolling EPS, especially when new earnings data becomes available or when there are significant changes in the company’s outlook. However, it’s essential to avoid overreacting to short-term fluctuations and focus on long-term trends.
Can rolling EPS be negative?
Yes, rolling EPS can be negative if a company’s net income is negative over the specified period. Negative rolling EPS may indicate financial difficulties or temporary setbacks, but investors should examine the reasons behind the negative earnings and assess the company’s prospects accordingly.
Is rolling EPS suitable for all types of companies?
While rolling EPS can provide valuable insights for many companies, its usefulness may vary depending on the industry and business model. Companies with stable earnings and predictable growth trends may benefit more from rolling EPS than those in volatile or cyclical industries.
How can investors mitigate the risks associated with rolling EPS?
Investors can mitigate risks associated with rolling EPS by diversifying their investment portfolio, conducting thorough research, and staying informed about industry trends and regulatory changes. Additionally, verifying the accuracy of earnings forecasts and analyzing the quality of earnings can help reduce potential risks.
Are there any alternatives to rolling EPS?
Yes, several alternative metrics can complement or serve as alternatives to rolling EPS, including trailing EPS, forward P/E ratio, price-to-sales ratio, and discounted cash flow analysis. Each metric has its advantages and limitations, so investors should consider multiple factors when evaluating a company’s performance and valuation.
How does rolling EPS impact dividend decisions?
Rolling EPS can influence dividend decisions by providing insights into a company’s earnings stability and growth prospects. Companies with consistent and growing rolling EPS may be more likely to maintain or increase dividends over time, while those with fluctuating or declining earnings may face challenges in sustaining dividend payments.
Key takeaways
- Rolling EPS combines historical and forecasted earnings, providing a balanced view.
- It helps investors assess a company’s performance and valuation accurately.
- Rolling EPS calculation involves adding past and future net income and adjusting for preferred dividends.
- Investors should be cautious of manipulated EPS figures and verify data from financial statements.
- Rolling EPS offers a forward-looking perspective compared to trailing EPS, which relies solely on historical data.
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