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 does the forward p/e indicate about a company?

    Explore the forward price to earnings ratio and learn its significance and how it compares to the traditional price to earnings ... Read Answer >>
  2. How can I calculate the forward p/e of the S&P 500?

    Learn how forward P/E is calculated for the S&P 500. Forward P/E is an important metric appropriate for changing market conditions. Read Answer >>
  3. Over what time period should I be looking at the forward rate?

    Read about forward rates and forward prices, how they function, and which rates you should look at based on your own investment ... Read Answer >>
  4. What is the formula for calculating earnings per share (EPS)?

    Learn why earnings per share (EPS) is often considered to be one of the most important variables in determining a stock’s ... Read Answer >>
  5. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  6. What is the formula for calculating earnings per share (EPS) in Excel?

    Understand the basics of the earnings per share ratio and how this important financial metric is calculated in Excel and ... Read Answer >>
Related Articles
  1. Investing

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  2. Investing

    ConocoPhillips Second Quarter Earnings Preview

    ConocoPhillips (NYSE:COP) will release its second quarter earnings on Wednesday, July 25, 2012. Analysts have become increasingly bearish on the company over the last month, with the consensus ...
  3. Investing

    GE P/E Ratio: A Quick Analysis

    A quick calculation and analysis of GE's trailing and forward P/E ratios.
  4. Investing

    American Airlines P/E Ratio: A Quick Analysis (AAL, DAL)

    A quick analysis of American Airlines Group Inc., using the ubiquitous price-to-earnings ratio.
  5. Investing

    The Netflix P/E Ratio: What You Need To Know

    We show you how to compute and analyze the P/E ratio for Netflix.
  6. Investing

    General Electric Second Quarter Earnings Preview

    General Electric (NYSE:GE) is expected to report increased earnings when it releases its second quarter results on Friday, July 20, 2012. The consensus estimate is anticipating a profit of 37 ...
  7. Investing

    Beware False Signals From The P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but no one ratio can tell the whole story.
  8. Insights

    Earnings Forecasts: A Primer

    Learn how this key metric is calculated and how it is used to judge market performance.
  9. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
RELATED TERMS
  1. Forward Earnings

    A company's forecasted, or estimated, earnings made by analysts ...
  2. Trailing EPS

    The sum of a company's earnings per share for the previous four ...
  3. Primary Earnings Per Share (EPS)

    One of two methods for categorizing shares outstanding. The other ...
  4. Interim Earnings Per Share

    A measure of earnings calculated at a specified time, shorter ...
  5. Forward Spread

    The price difference between the spot price of a security and ...
  6. Cash Earnings Per Share - Cash EPS

    A measure of financial performance that looks at the cash flow ...
Hot Definitions
  1. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  2. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  3. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  5. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
  6. Porter Diamond

    A model that attempts to explain the competitive advantage some nations or groups have due to certain factors available to ...
Trading Center