Understanding Trailing Earnings Per Share (EPS)

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  • 14 Dec 2023
Understanding Trailing Earnings Per Share (EPS)

Key Highlights

  • Trailing Earnings Per Share (EPS) is a critical metric used by investors to assess the profitability and expansion of a firm.
  • Making educated selections is aided by this historical statistic, which is based on prior earnings.
  • An important draw for investors is its ability to show annual and quarterly growth trends; a drop could warrant concern.
  • The statistic helps investors make wise investment decisions for a profitable portfolio by enabling them to assess a company's financial health and future prospects.
  • A key indicator of a company's historical performance, trailing EPS is essential for investment research.

What Is Trailing Earnings Per Share

The term "trailing" indicates that the EPS is based on historical data rather than future estimates. Trailing EPS may be calculated for any time period. However, it is most commonly reported for the previous 12 months or four quarters. This is known as trailing 12-month (TTM) or trailing four-quarter (TFQ) earnings per share. The benefit of adopting trailing EPS is that it uses real figures rather than estimates or assumptions. The majority of price-to-earnings (P/E) ratios are based on trailing EPS since it represents what has already occurred rather than what could occur in the future. However, trailing EPS might be out of date since it does not account for market or business operational changes. As a result, many investors consider current and predicted future EPS, which are based on analyst projections and are referred to as earnings estimates.

Analysts can also study trends and patterns in a company's earnings using trailing EPS. Analysts can analyse trailing EPS from different periods to understand how a company's profitability has evolved over time. They can also concentrate on certain quarters that are critical to a company's operations. For merchants, for example, the fourth quarter is typically particularly important since it encompasses the Christmas and holiday seasons.

Analysts might compare a company's fourth-quarter trailing EPS from prior years to see how well it did during this peak time. They may also examine the trailing 12-month EPS for these years to observe how the fourth quarter affects the company's total earnings.

Importance of Price to Earnings

The Price-to-earnings (PE) ratio reveals how much investors are willing to pay for one rupee of the company's earnings per share (EPS). This helps determine if a firm is overpriced or undervalued. A PE ratio of 20 reflects how long it takes for accumulated earnings to level the investment's price.

A high PE ratio indicates that the stock's price exceeds its earnings per share. This might imply that a company's stock is overpriced and may decline in the future.

The Trailing Price to Earnings (PE) ratio represents the connection between a company's stock price and its trailing earnings per share. This statistic compares the stock market value of a firm to its trailing earnings per share (EPS).

The trailing price-to-earnings ratio accuracy is more critical since it delivers a more realistic result because it incorporates correct parametric statistics.

Example of Trailing Earnings Per Share (EPS)

For example, a company's quarterly financial statements for fiscal year 2021-22 (FY22) disclose earnings per share as

  • INR 3.78 in the first quarter,
  • INR 4.01 in the second quarter,
  • INR 3.32 in the third quarter,
  • INR 3.09 in the fourth quarter
  • for a total trailing profit per share of INR 14.2 at the end of FY22.

If the results for Quarter I FY23 are INR 3.95, the new trailing EPS at the end of Quarter I FY23 will be INR 15.06. As soon as the latest statistics are revealed, Quarter I of FY 22 is removed from the computation.

Growth or Decline in Trailing Earnings Per Share

Growth-oriented investors like to direct their capital towards businesses that consistently raise their profitability year over year and from quarter to quarter. When evaluating the company's trajectory, their study frequently focuses on trailing EPS or yearly EPS.

It's critical for growth-oriented investors that quarterly earnings beat the same time last year. They also aim for fiscal year results that are higher than the previous fiscal year. Investors can assess trailing EPS even in the absence of fiscal year data by contrasting it with the prior fiscal year and hoping to see an upward trend.

A subset of growth investors also scrutinize earnings estimates, hoping to see an increase in predicted earnings for the next quarters.

A decline in the rate of percentage increase between quarters or years indicates slowing growth, signaling that the company's expansion is moderating compared to its earlier pace. Such deceleration can be a cautionary signal for certain growth investors, encouraging them to consider reducing their exposure to long-term positions.

Conversely, when quarterly, yearly, or trailing EPS exhibits a decline relative to preceding figures, it indicates a lack of growth and a contraction within the company. Such stagnation runs counter to the preferences of growth investors, as they seek vibrant, upward momentum.

Conclusion

Trailing earnings per share (EPS) is a crucial tool for investors to evaluate a company's profitability and growth. It aids in decision-making by examining a company's historical earnings. Gains in earnings both annually and quarterly are attractive to investors. Should the growth decrease, they may exercise caution in their decision-making. Investors can gain insight into a company's financial health and growth prospects by examining its trailing earnings per share (EPS). They may use this to make wise investing choices.

FAQs on Trailing Earnings Per Share

Trailing EPS is historical and doesn't guarantee future success, but it offers insights into a company's past profitability trends.

Trailing EPS reflects past earnings, while Forward EPS estimates future earnings, usually based on analyst forecasts.

Generally, a higher Trailing EPS is preferable, indicating sustained profitability, but it's crucial to consider growth consistency.

A decrease in Trailing EPS may indicate a slowdown in a company's growth compared to previous periods.

Trailing EPS provides insight into a company's financial health and potential, enabling informed investment choices for investors.

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