What Is Rolling EPS?
Rolling EPS gives an annual earnings per share (EPS) estimate by combining EPS from the past two quarters with estimated EPS from the next two quarters.
It may be calculated with the following formula:
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding
- Rolling EPS (earnings per share) gives an annual EPS estimate by combining EPS from the past two quarters with estimated EPS from the next two quarters.
- Earnings forecasts are often too rosy, possibly making a company’s shares look cheap.
- Historical earnings, meanwhile, are set in stone but may not fairly represent a company's legitimate growth potential.
- Rolling EPS represents a compromise, giving investors a blend of both.
Earnings Per Share Explained
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 also frequently used to determine if 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 how much we pay for $1 of a company’s profit. In other words, if a company is currently trading at a P/E of 20x that would mean an investor is willing to pay $20 for $1 of current earnings.
The share price of a stock may look cheap, fairly valued or expensive, depending on whether you look at historical earnings or estimated future earnings.
Earnings forecasts are based on educated guesswork from analysts and are often too rosy, possibly making the valuation look cheap. Historical earnings, on the other hand, are set in stone but may not fairly represent a company's legitimate growth potential. Rolling EPS represents a compromise, giving investors 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). Now 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 isolation. However, when cross-referenced with the P/E multiples of other similar companies, it could give us an idea of whether ABC’s shares offer good value or not.
Rolling EPS vs. Trailing EPS
Rolling EPS shouldn’t be confused with trailing EPS, which mainly uses the previous four quarters of earnings in its calculation.
Sometimes you may hear or spot the term rolling trailing EPS, as well. What this means is that EPS will change as the most recent earnings are added to the calculation and earnings from five quarters ago are dropped to make way for them.
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 may treat a hefty operating expense as an unusual charge and exclude it from its EPS calculation.
Be careful when using reported EPS figures to calculate rolling EPS as they might be distorted and flatter the company's profit.
Ignore the numbers the corporate spin doctors want you to fixate on and read the fine print. Further down in the financial statement you should find a more accurate EPS figure, together with the footnotes that reveal the practices and reporting policies of the company's accounting methods.