Rolling Earning Per Share (EPS)

The main purpose of investing in a stock market is to obtain profits. Evidently, over the years, equity investing has generated more returns compared to the traditional forms like savings accounts and fixed deposits. Stock markets allow investors to purchase shares and become part-owners in various businesses in the proportion of the stock purchased, without involving them actively in the company. This means that if the company makes a profit, it Shares a part of its earnings with you as the investor as dividends.

There are numerous indicators involved in checking a company’s profitability. One essential profitability indicator is Earnings Per Share (EPS). A company’s earnings on a per-share basis constitute the EPS. Investors can use various forms of earnings per share, but to estimate annual earnings per share, the rolling earnings per share (EPS) is a good measure. This article details what rolling earnings per share (EPS) is.

What is Rolling Earnings Per Share (EPS)?

The rolling earnings per share (EPS) meaning is derived by combining the company’s earnings per share for the past two quarters with the forward EPS from the next two quarters.

The rolling earnings per share (EPS) is calculated for a year. Rolling Earnings Per Share is the hybrid form of the Trailing Earnings Per Share and the Forward Earnings Per Share.

According to the Rolling Earnings Per Share definition, net income considered to measure the rolling EPS is the reported net income from the past 6 months and the projected net income of the next 6 months, adjusted to the preferred dividend.

The mathematical formula to calculate the Rolling Earnings Per Share is:

(Earnings from the past two quarters + projected earnings for the next two quarters - preferred dividends)/by the average outstanding shares of the company.

Historical factors that generated the previous results might not be the same in the future and therefore pure-play historical returns might not be a good measure to base the profitability expectation. Similarly, analysts make several assumptions to quote the expected future earnings and can be biased at times. This in turn also does not make for a good measure to base the profits expectation for the future.

Rolling EPS is the combination of both these measures. Rolling earnings per share tries to eliminate the delusion of the historical returns and uncertainty of the future forecasts to some extent.

It is important to note that earnings per share (EPS) is not necessarily the actual profit distributed to every shareholder. Earnings per share can be re-invested completely or in parts to expand the business, known as the retained earnings. Another way these earnings can be used is to payout whole or in part to the shareholders as dividends.

Earnings Per Share measures the profitability of the company and this earnings potential should ideally reflect in the company’s share price. In turn, it also helps to know the value of a company, in the form of the Price to Earnings (PE) ratio.

PE ratio indicates the price investors are ready to pay for Rs. 1 of the EPS of the company. This helps understand if a company is overvalued or undervalued.

How does Rolling Earnings Per Share work?

Rolling earnings per share work on the principle of future predictions and historical returns. This measure provides the best of both the trailing earnings per share and the forward earnings per share.

While Trailing Earnings Per Share use the previous four quarters’ figures, forward earnings per share use assumptions to predict the future earnings. Both of these measures might not be a perfect indicator as the historical returns produced in the past in certain market conditions might not prevail in the future and the predicted future earnings might fail if assumptions fail.

Therefore, rolling earnings per share can provide a better profitability figure blending both the trailing earnings per share and the forward earnings per share.

Example of Rolling EPS

Suppose the company you want to invest in reported an EPS of INR 3 and INR 2.5 respectively, in the previous two quarters. Let’s say quarter three and quarter four of the financial year 2021-2022 (FY22). Going forward, stock market analysts and industry experts are confident on the company's business to grow and provides an earnings forecast of INR 5 and INR 4.5 per share in the next two quarters, i.e., quarter one and quarter two of the financial year 2022-2023 (FY23).

Based on the above figures, actual and projected earnings, the company’s rolling earnings per share at the end of quarter four FY22 is INR 15 (3 + 2.5 + 5 + 4.5).