A:

Earnings per share (EPS) serves as an indicator of a company’s profitability. It is often considered to be one of the most important variables in determining a stock’s value, and it comprises the “E” part of the P/E (price-earnings) valuation ratio. EPS is calculated as:

EPS = net income / average outstanding common shares

There are three basic types of EPS numbers based on where the data comes from:

  • Trailing EPS – based on the previous year’s number
  • Current EPS – based on this year’s numbers, which are still projections
  • Forward EPS – based on future numbers, which are projections

A trailing EPS uses the previous four quarters of earnings in its calculation, and has the benefit of using actual numbers instead of projections. Most price to earnings ratios (P/Es) are calculated using the trailing EPS because it represents what actually happened, and not what might happen. Although the figure is accurate, the trailing EPS is “old news” and many investors will also look at current and forward EPS figures.

The current EPS typically includes the four quarters of the current fiscal year, some of which may have already elapsed, and some of which are yet to come. As a result, some of the data will be based on actual figures and some will be based on projections.

A forward EPS is based purely on projections for some period of time in the future, typically the coming four quarters. Forward EPS estimates can be made by analysts or by the company itself. While this number is based on estimates and not facts, investors are often interested in forward EPS since they want to know about the future earning potential of a company.

Investors often compare the different EPS calculations. Investors, for example, may compare the forward EPS (projections) with the company’s actual earnings per share for the current quarter. If the actual EPS falls short of forward EPS projections, the stock price may fall. If the actual EPS beats estimates, however, the stock may experience a short rally.

RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. What items are considered liquid assets?

    Learn what a liquid asset is, some examples of liquid assets, what a non-liquid asset is and what determines whether as asset ... Read Answer >>
  3. What is the formula for calculating EBITDA?

    Learn about EBITDA and how companies can manipulate this calculation to look more profitable. Read Answer >>
  4. What is the formula for calculating the debt-to-equity ratio?

    Find out how to use this fundamental financial ratio to help assess a company's performance. Read Answer >>
  5. How do I calculate the P/E ratio of a company?

    Find out how to calculate this common valuation ratio and what the results can tell you about a company's performance. Read Answer >>
  6. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Answer >>
Related Articles
  1. Personal Finance

    6 Things To Look For In Earnings Reports

    Learn how to consider all the known variables when assessing a company's health.
  2. Markets

    The Most Important Metrics For Earnings Season

    Knowing how to read an earnings report can help investors decide which stocks to buy.
  3. Fundamental Analysis

    Apple Stock: An Earnings Case Study (AAPL)

    Discover an earnings case study on Apple, and learn about its EPS and revenue growth rates, and what analysts are projecting for Apple in 2016 and 2017.
  4. Term

    What Is Stockholders' Equity?

    Stockholders’ equity represents the equity that shareholders own in a company.
  5. Fundamental Analysis

    4 Challenges China Faces According to PIMCO

    Get the latest thoughts from Luke Spajic, executive vice president and portfolio manager in Singapore for PIMCO, on challenges facing China's economy.
  6. Markets

    Re-Emerging Markets?

    If you're wondering when will the emerging markets comeback be? Read on because is still young, but encouraging.
  7. Fundamental Analysis

    Alcoa vs. BHP Billiton: Which Is Better for My Portfolio?

    Obtain an up-to-date overview of BHP Billiton and Alcoa, Inc., two key players for investors seeking exposure to the aluminum market to consider.
  8. Sectors

    The Debt Report: The Telecom Sector

    Discover how America's telecommunications providers have been piling on debt since the Great Recession, and how part of the sector seems vulnerable.
  9. Fundamental Analysis

    Value Investing: 5 Tips to Consider in 2016

    Read five tips for value investors to consider in 2016, including how to look beyond traditional metrics and when to expand outside of the value zone.
  10. Stock Analysis

    4 Oil Companies Swimming in Debt to Avoid (HK, SWN)

    Discover which oil and natural gas companies American investors should avoid in 2016, and why the industry is awash with debt and liquidity problems.
RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. Basic Earnings Per Share

    A rough measurement of the amount of a company's profit that ...
  3. Primary Earnings Per Share (EPS)

    One of two methods for categorizing shares outstanding. The other ...
  4. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  5. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  6. Liability

    A company's legal debts or obligations that arise during the ...

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center