What Is Trailing EPS?
The term "trailing" moreover implies a value calculated on a rolling basis. That is, trailing EPS may describe the most recent 12-month period or four earnings releases. The period used for a trailing EPS will change as the most recent earnings are added to the calculation and earnings from five quarters ago are dropped from the calculation.
- Trailing EPS typically refers to a company's earnings per share as a rolling total over the previous four quarters.
- EPS is a widely-used measure of a company's profitability.
- Trailing EPS shows what happened in the past, but does not forecast what may happen in the future.
- To forecast future earnings, traders and analysts apply models to extrapolate prior EPS figures, as well as look at earnings forecasts.
Earnings Per Share Explained
Understanding Trailing EPS
Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. The higher a company's EPS, the more profitable it is considered to be.
The descriptive word "trailing" implies "previous years," in contrast to a present or forward-looking EPS. Most recorded and quoted EPS values are trailing.
A trailing EPS often 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 (P/E) ratios are calculated using the trailing EPS because it represents what's actually happened, and not what might happen in the future. Although the figure is accurate, the trailing EPS is “old news,” and many investors will also look at current and expected future EPS figures. Future EPS estimates are based on analyst expectations and are called earnings forecasts.
Trailing EPS enables trend analysis. Analysts will commonly compare different quarters on a trailing basis while keeping a close eye on a particular quarter. For instance, the fourth quarter for a retailer (Christmas and Holiday season) is particularly important. Analysts will compare fourth-quarter year-over-year changes in key fundamentals, while also comparing the trailing 12-month results for these periods.
Trailing EPS for public companies are widely reported on financial news sites.
Growth or Decline in Trailing EPS
Growth investors look to invest in companies that are increasing earnings quarter-over-quarter and especially year-over-year. They can analyze trailing EPS or yearly EPS to see if the company is doing that.
Growth investors want to see quarterly earnings increase relative to the same quarter in the prior year. They also want to see earnings for the fiscal year higher than the prior fiscal year. In addition, if the fiscal year results have not been reported yet, the investor may also look at the trailing EPS and compare it to the prior fiscal year. Trailing EPS will ideally be higher.
Some growth investors also look at earnings forecasts, and will want to see forecast earnings for future quarters also moving up.
A drop in the percentage increase from quarter-to-quarter or year-to-year is declining growth, and signals the company is still growing but not at the same pace it once was. For some growth investors, this is a warning sign to start getting out of long positions.
If quarterly or yearly EPS, or trailing EPS, is falling relative to prior figures, then there is no growth and the company is seeing a contraction. This is not the type of action growth investors are looking for.
Real World Example of Trailing EPS
For example, let's look at a hypothetical period for Apple Inc. (AAPL) earnings. Assume that on:
- On April 30, 2021, Apple announced earnings of $2.46
- On January 29, 2021, they announced earnings of $4.18.
- On November 1, 2020, they declared earnings of $2.91.
- On July 31, 2020, earnings were $2.34.
If these were the four most recent quarters, these figures would be used to generate the trailing EPS of $11.89.
When the next earnings release comes out, the oldest period from above will be dropped. For example, if Apple releases earnings on July 31, 2021, then the earnings from July 31, 2020, will be dropped from the calculation and be replaced by the newer figure.