Earnings per share (EPS) is one of the most important ratios used to understand the value of a stock. It is important in its own right, but it is also an important part of another key ratio: price/earnings ratio.
As noted in this article on EPS, you calculate the ratio by dividing earnings (net income) minus preferred dividends by the average number of outstanding shares of the stock. Outstanding shares are those available for trade on the stock markets.
However, there are several varieties of EPS that may add more information to your decision making. The three major variations are:
- Trailing EPS – last year’s numbers and the only actual EPS
- Current EPS – this year’s numbers, which are still projections
- Forward EPS – future numbers, which are obviously projections
A trailing EPS uses the past four quarters of earnings to make the calculation. This has the advantage of historical accuracy (no projections), which is important in understanding what has happened.
However, the trailing EPS tells you little about what the company will do in the next four quarters. Here's where you need to do some homework. If the past four quarters were uneventful, you can make more confident projections.
But, if the company suffered an extraordinary loss or gain, the trailing EPS may not be helpful.
The current EPS, which is often the one quoted, may include the four quarters of the current fiscal year – some of which have not happened yet. This means part of the data is actual and part is projected. It is worth noting that the shorter the look into the future, the more accurate projections are likely to be.
The forward EPS projects the ratio out for some quarters. It is important to know how far out the projection looks. The farther out projections go, the less accurate they are likely to be.
Each of these ratios can be helpful, especially when comparing companies in the same industry. Be sure the EPS you use is calculated the same way for both companies (same time period) or you may come up with a false answer.There are other variations on the EPS ratio, however if you understand these basic ratios, you will have most of the information you need.