EPS forecast

EPS forecast

Forecasting is a key strategy for guiding investments across various industries and regulatory frameworks. EPS forecasting analysis, along with a variety of factors into consideration, offers various opportunities for success and generates greater returns to long-term investors. For investors looking to maximise their profits while navigating the volatile and competitive stock market, EPS forecasting can be an essential tool. 

What is an EPS forecast? 

The earnings per share (EPS) forecast is a financial analysis that illustrates the projected revenue for each outstanding share of a company’s stock over a specific time frame, typically a fiscal year or quarter. When assessing a company’s potential profitability and growth, investors, analysts, and stakeholders rely significantly on it. 

The process of generating forecasts for EPS involves an in-depth review of historical financial data, industry dynamics, market patterns, and macroeconomic parameters. By helping investors navigate the complexity of the financial markets with better clarity and confidence, these forecasts help them in making well-informed decisions about stock valuation, investing strategies, and portfolio management. 

Understanding an EPS forecast 

Earnings per share, or EPS, is a financial indicator that shows how much of a company’s profits are distributed to every outstanding share of its common stock. Investors frequently consider it a significant measure of a company’s profitability to evaluate its performance and determine the value of its shares. 

Revenue forecasting, operational costs, taxes, interest charges, and outstanding shares are some variables that affect EPS forecasts. Analysts create these forecasts to evaluate macroeconomic variables, corporate advice, industry trends, and financial models. 

Investors rely on EPS forecasts to evaluate a company’s profitability, consider its position against competitors, and make well-informed investment decisions. Although a lower EPS forecast can imply difficulties or slower growth, a higher EPS forecast suggests potential profitability and expansion. 

Formula of an EPS forecast 

The standard EPS formula is: 

                                   Net income – preferred dividends 

EPS =   —————————————————————————— 

                       weighted average number of outstanding shares 

Calculations of an EPS forecast 

The following formula may be performed to determine the forecasted EPS in the stock market: 

                                         Projected Earnings 

EPS =    ———————————————————————— 

                         Projected diluted shares outstanding 

Where: 

  • Projected earnings may be forecasted by projecting future sales for the business and deducting forecasted expenses like interest, taxes, operational expenditures, and cost of goods sold (COGS).  
  • Projected diluted shares outstanding include the overall amount of shares that may be in circulation if all convertible securities—like warrants, convertible bonds, and stock options—were to be converted into shares or exercised. 

Investors and analysts may estimate the company’s EPS and gain important information about its future profitability and stock market performance by using this approach to calculate the forecasted profits and diluted shares outstanding correctly. 

Examples of an EPS forecast 

Understand the EPS forecast with the following scenario: 

For example, company ABC is set for the release of its EPS forecast for the coming year. With 100,000 shares outstanding, the corporation projects a net income of $USD 7,000,000 for that period of time. It also holds 100,000 potentially dilutive shares, such as convertible bonds and stock options. 

It is simple to make the initial forecast using the basic EPS formula: 

                                         (Net income – preferred dividends)  

Basic EPS = ————————————————————————————— 

                         Weighted average number of common shares outstanding 

 

 

                                             US$ 7,000,000 – 0 

Therefore, basic EPS = ————————————  = US$ 7.00 per share                                                                                       

                                                    1,000,000  

However, the company additionally calculates the diluted EPS, considering the possible influence of the 100,000 dilutive shares, to offer a more conservative forecast. 

                                               (Net Income – Preferred Dividends) 

Diluted EPS = ——————————————————————————————————— 

                         (Weighted average number of common shares outstanding + prospective new shares from dilutive securities) 

  

                                                  US$ 7,000,000 – 0 

Therefore, diluted EPS = ——————————————  = US$ 6.36 per share                                                                                       

                                              (1,000,000 + 100,000) 

Considering potential dilution into account, the diluted EPS forecasting in this scenario is US$ 6.36 per share, compared to the fundamental EPS forecast of US$ 7.00 per share. This illustrates the distinction between the two EPS measures and the effect of prospective dilution on EPS for the company. 

Frequently Asked Questions

Calculating basic EPS requires dividing the total number of outstanding common shares by the weighted average earnings available to common shareholders. 

On the other hand, the concept of diluted EPS considers the potential for dilution from convertible investments or securities, such as convertible bonds and stock options, which may increase the number of outstanding shares if there is a conversion.

Earnings Per Share (EPS) is the company’s net profit divided by its outstanding shares, which indicates the profit per share. Adjusted EPS modifies this figure by subtracting one-time expenses and revenues, providing a more accurate view of ongoing operational success. 

Although EPS represents reported earnings, adjusted EPS provides investors with a more realistic overview of a company’s primary earnings potential by considering exceptional circumstances like asset sales or restructuring expenditures. 

Some of the limitations of EPS include the following: 

  • The lack of consideration for acquisition costs in EPS might result in misunderstandings. 
  • Share buybacks and stock splits are two ways companies might alter earnings per share.  
  • Companies can easily manipulate the EPS by buyback of shares or by splitting the stocks.  
  • EPS does not consider cash flow or reflect non-cash expenditures like depreciation.  

Analysts often use various techniques to forecast EPS, including regression analysis, industry comparisons, trend analysis, and financial modelling. To forecast future profits, they evaluate operating margins, expense patterns, and revenue growth. Regularly revise forecasts in light of latest information, and modify investment plans accordingly. Investors may successfully forecast EPS and make well-informed judgements by utilising a rigorous analytical technique. 

A publicly listed company’s total number of outstanding shares is typically available on their websites, stock exchanges, or the shareholder’s equity portion of the balance sheet as filed with an authorised data provider such as the U.S. Securities and Exchange Commission. Total authorised shares, outstanding shares, and floating shares are added together in this section. 

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