What is the difference between TTM EPS and Forward EPS?

Let’s have a look at two approaches used by investors to calculate EPS. However, before that, let’s understand the concept of EPS. 

What is EPS? 

EPS is the abbreviated form of earnings per share. It helps to analyse how much money a company earns for one share. It is calculated by dividing the company’s profit by its total outstanding shares. A higher EPS is considered better as it shows that the company is making good profits. 

A gradually rising EPS indicates that the company is still growing. Companies with a rising EPS are preferred by growth investors. On the contrary, a flat or steady EPS indicates that the company is not growing at the same pace as earlier.  

There are two ways to calculate EPS: TTM EPS and Forward EPS. Let’s understand the difference between the two. 

TTM EPS 

TTM is the abbreviated form of twelve trailing months. And so, TTM EPS is a valuation of earnings per share of the recent 12 months. Here, the latest four earnings releases are considered for calculating the EPS. Since it is a trailing earnings ratio; data is calculated on a rolling basis. This calculation will change with every new earnings release. 

An argument against the use of TTM EPS is that this approach makes use of previous data. Hence, there is a risk that the earnings in future might not follow the old trend, and thereby, affect the profits of the investor. 

Forward EPS 

A forward EPS is simply a forecast of the future earnings of the company. It is calculated using the same formula but makes use of expected/forecasted earnings in the future. Estimates for forecasts are taken from the management guidance, which is provided with the earnings release and is updated regularly. The historical earnings, the nature of the industry, its lifecycle, etc. also provide critical information for determining the future earnings.  

Since capital markets are forward-looking, forward valuations are preferred by investors to determine whether they should invest in a particular company or not. 

The downside of this approach is that the estimates or forecasts used in the calculation may be wrong. The earnings might not turn out to be what was estimated earlier, and thereby, affect the profits of the investor.