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. What is the difference between called-up share capital and paid-up share capital?

    Find out about the difference between called-up and paid-up share capital, including an explanation of the four categories ...
  2. Why can additional paid in capital never have a negative balance?

    Find out why the additional paid-in capital entry on a company's balance sheet can never be negative and how paid-in capital ...
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Discover how the fixed charge coverage ratio is useful to investors and analysts, and when it suggests that a company should ...
  4. What is the difference between the return on total assets and an interest rate?

    Learn the difference between the return on total assets and an interest rate; the former is a profitability ratio, and the ...
RELATED TERMS
  1. Basic Earnings Per Share

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

    One of two methods for categorizing shares outstanding. The other ...
  3. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
  4. Capitalized Cost

    An expense that is added to the cost basis of a fixed asset on ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...

You May Also Like

Related Articles
  1. Personal Finance

    6 Things To Look For In Earnings Reports

  2. Term

    Basic Earnings Per Share

  3. Term

    Primary Earnings Per Share (EPS)

  4. Markets

    The Most Important Metrics For Earnings ...

  5. Term

    Price-Earnings Ratio - P/E Ratio

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!