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The popularity of investing in shares is rising due to the return it brings to traders and investors. When an individual buys the shares of a particular investor, it means that they have bought the shares of the company against a part of the company ownership. Now if the company will earn a profit they will give you a part of their earnings as dividends.
Now, rolling earnings per share is one way of calculating the profits made by a accompany. In this article, we will look at what is rolling EPS and the pros and cons of rolling EPS.
What is rolling EPS?
The earnings per share, as the name suggests, refers to the earnings made by the company per share. The rolling EPS is calculated by combining the company’s earnings per share for a period of the last two quarters together with the forward EPS for the next two quarters. It is always calculated for the entire year. The rolling EPS is measured by considering the net income from the last 6 months and net income from the following 6 months after adjustment to the preferred dividend. The rolling EPS is the hybrid version of Trailing Earnings Per Share and the Forward Earnings Per Share.
How to calculate rolling EPS?
The past performance of the company can only predict the future performance but not exactly. Likewise, the analysts can make assumptions about the future performance of the company but both of these can be faulty. As a result, the rolling EPS is used that combines both these estimations together to eliminate the uncertainties of the historical and future predictions.
However, you must keep in mind that the earnings per share are not necessarily given to the shareholders as a whole. A part of this or even the whole can be retained to expand the business.
The earnings per share also assist in understanding the value of a company by calculating the price to earnings or the PE ratio. This ratio indicates the price that an investor is willing to pay the company for Rs. 1 of the company’s EPS. The PE ratio helps understand whether a company is currently overvalued or undervalued.
The formula for calculating rolling EPS is (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding.
Let’s take a rolling EPS example to understand it better. Let us assume that a company you are considering investing in has reported an EPS of INR 3 and INR 4 lakhs in the previous two quarters. The analysts are sure that the EPS will grow further in the future and will be INR 4 and INR 5 lakhs in the next two quarters. In this case, the rolling EPS will be 16 (3+4+4+5).
Advantages of rolling earning per share
There are different advantages of calculating the rolling EPS of companies before investing in them; these include:
- Analyse performance
The rolling EPS helps the investors analyse the performance of the business by considering the historical performance as well as the expected performance. This can also be compared with other companies to assess the investment.
- Overall financial standing
The rolling EPS helps investors analyse the company’s overall financial health. Companies with a stable EPS indicate a reliable investment option.
- Profitability and dividends
A higher rolling EPS indicates that the company is earning good profits. This means that the shareholders can receive better returns and dividends.
With these advantages, there is also a limitation of the EPS calculation. It does not take into account the cash flow of the company that assesses its ability to pay back the debts. This is one reason why the EPS calculations can be misleading sometimes.
Conclusion
The rolling earnings per share is a good marker for assessing the profitability of the company and, hence, getting an idea of how good investing in a company’s stock can be. It helps you assess the financial health of the company and also compare it with others. Since the rolling EPS is considered a combination of past records as well as future predictions, it is a foolproof way of knowing if investing in a stock is worth it or not.
FAQs
Rolling EPS is a measure of the EPS of the last two-quarters of the company combined with the analysis of the next two quarters to assess the overall performance of the company.
It is important to calculate the rolling EPS because it provides insight into the portability of the company in the past as well as its expectations in the future. It helps investors compare different companies and set their expectations when investing in a company.
The trailing EPS only considers the past performance of the company with no consideration of how the company is expected to perform in the future. On the contrary, rolling EPS considers past perform as well as future expectations to provide a better insight.
The disadvantage of rolling EPS is that it does not consider the cash flow. As a result, investors cannot analyse the strength of the company in paying back its debts.
The formula to calculate rolling EPS is (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding.