Rolling EPS

Rolling EPS is a financial metric that evaluates a company's earnings per share (EPS) over a continuous 12-month period, helping investors and traders assess profitability trends and make informed decisions.

Understanding Rolling EPS

What Is Rolling EPS?

Rolling EPS is calculated by summing a company's earnings over the latest four quarters and dividing by the number of shares outstanding, offering a clearer view of financial performance over time.

Why It Matters

• Trend Analysis: Rolling EPS helps identify earnings trends that can signal potential stock movements.
• Comparison: It enables consistent comparisons of companies within the same industry, regardless of seasonal variations.
• Investment Decisions: An increasing Rolling EPS can indicate improving profitability, making a company more attractive to investors.

How to Calculate Rolling EPS

Calculating Rolling EPS involves a straightforward approach:

1. Gather Earnings Data: Collect earnings data from the last four quarters.
2. Total Earnings: Add the earnings from these quarters together.
3. Divide by Shares Outstanding: Divide the total by the number of shares outstanding.

Formula:
[ \text{Rolling EPS} = \frac{\text{Earnings (last 4 quarters)}}{\text{Shares Outstanding}} ]

Example:
If a company reported earnings of $1.2 million, $1.5 million, $1.3 million, and $1.4 million over the last four quarters and has 1 million shares outstanding:

[ \text{Rolling EPS} = \frac{1.2 + 1.5 + 1.3 + 1.4}{1,000,000} = \frac{5.4}{1,000,000} = 5.4 ]

This means the Rolling EPS is $5.40 per share.

Rolling EPS in Action

To see the practical application of Rolling EPS, let’s look at two fictional companies in the tech sector:

Company A: Tech Innovations Inc.

• Quarter 1: $0.50
• Quarter 2: $0.60
• Quarter 3: $0.55
• Quarter 4: $0.70

Rolling EPS Calculation:
[ \text{Rolling EPS} = \frac{0.50 + 0.60 + 0.55 + 0.70}{1} = 2.35 ]

Company B: Future Gadgets LLC

• Quarter 1: $0.45
• Quarter 2: $0.50
• Quarter 3: $0.55
• Quarter 4: $0.65

Rolling EPS Calculation:
[ \text{Rolling EPS} = \frac{0.45 + 0.50 + 0.55 + 0.65}{1} = 2.15 ]

Comparing Companies

When comparing the two companies, Tech Innovations Inc. has a higher Rolling EPS of $2.35 compared to Future Gadgets LLC's $2.15. This could indicate that Tech Innovations is performing better financially, influencing your trading decisions if you're looking to invest in the tech sector.

Interpreting Rolling EPS Data

Positive Trends

A consistently increasing Rolling EPS over several quarters is often a bullish signal. For instance, if Company A's Rolling EPS increased from $2.00 to $2.35 over a year, it indicates strong growth, potentially attracting more investors.

Negative Trends

Conversely, a declining Rolling EPS may be a red flag. If Company B's Rolling EPS dropped from $2.30 to $2.15, it could hint at underlying issues that might impact share prices negatively.

Industry Benchmarks

It's essential to compare Rolling EPS figures against industry benchmarks. A high Rolling EPS in a struggling industry might not be as impressive as a lower Rolling EPS in a rapidly growing sector.

Factors Affecting Rolling EPS

Earnings Reports

Earnings reports provide the most immediate impact on Rolling EPS. A strong earnings report can boost the metric, while a disappointing one can drag it down.

Market Conditions

Broader market conditions also play a role. Economic downturns can affect overall profitability, influencing Rolling EPS across the board.

Seasonality

Some industries experience seasonal fluctuations, which can impact quarterly earnings. Rolling EPS helps mitigate this by averaging out these variations.

Actionable Strategies Using Rolling EPS

Trading Strategy 1: Earnings Momentum

1. Identify Companies with Rising Rolling EPS: Focus on stocks where Rolling EPS has increased for at least two consecutive quarters.
2. Set Entry Points: Enter trades when the stock price breaks above resistance levels, ideally after a positive earnings announcement.
3. Monitor for Exits: Be vigilant for signs of declining Rolling EPS, indicating it's time to exit the position.

Trading Strategy 2: Earnings Divergence

1. Find Divergences: Look for stocks where Rolling EPS is rising, but the stock price is declining, indicating a potential reversal.
2. Confirm with Technical Analysis: Use technical indicators (like RSI or MACD) to confirm the reversal signal.
3. Enter Long Positions: Consider entering a long position when the stock price begins to recover.

Trading Strategy 3: Sector Rotation

1. Analyze Sector Rolling EPS: Compare Rolling EPS across different sectors. Identify sectors with the highest aggregate Rolling EPS growth.
2. Shift Capital Accordingly: Reallocate your investments towards sectors showing strong earnings momentum.
3. Stay Updated: Regularly review sector performance, as trends can change quickly.

Common Questions About Rolling EPS

How Often Should I Check Rolling EPS?

It’s advisable to check Rolling EPS quarterly right after earnings reports are released to ensure you have the most current data for trading decisions.

What If a Company Has Negative Earnings?

If a company reports negative earnings, its Rolling EPS will also be negative, which can signal financial distress. It may be prudent to avoid investing in such companies until recovery signs appear.

Can Rolling EPS Alone Predict Stock Movements?

While Rolling EPS is a valuable metric, it should not be used in isolation. Combine it with other indicators for a well-rounded investment strategy.

What Are the Limitations of Rolling EPS?

Rolling EPS does not account for future earnings potential or external market factors and can be affected by one-time events that don’t reflect ongoing performance.

Conclusion

Understanding and utilizing Rolling EPS can significantly enhance your trading strategy. By keeping an eye on earnings trends, you can make informed decisions that align with market movements and company performance.