Trailing Earnings

Here are the trailing earnings for whatever.com:

- 23 cents a share 4 quarters ago
- 32 cents a share 3 quarters ago
- 41 cents a share 2 quarters ago
- 52 cents a share last quarter

So now we're at today. We just finished the first quarter of the new year to print that lovely 52 cents a share in earnings. The stock of whatever.com is trading at 100 bucks a share, and tons of Nervous Nelly investors are pulling out their hair over the very high multiple that this stock is trading at. So the trailing annual earnings of whatever.com were, well...just add ‘em up: 23 + 32 + 41 + 52 = $1.48.

Said another way, the trailing year’s earnings of the company were $1.48. And that means that, at 100 dollars a share, the company is trading at $100 divided by $1.48, or about 67x earnings. Whatever.com has a little bit of cash and no debt. So 67x earnings is a huge multiple. It's a multiple of trailing earnings. But consider the trend in earnings growth. The company has stated it thinks it’ll keep growing at “about this pace for the foreseeable future.” So if we do a little estimating, then forward earnings might see them print something like $0.64, $0.80, $0.95, $1.12, or something like that. If we add up those 4 subsequent forward earnings quarters, we get $3.51 a share in earnings.

So...wait a minute. We just came to the conclusion with the Nervous Nellies that this stock was soooo expensive. But on the projected forward earnings of $3.51 a share, at 100 bucks, it’s trading at $100 divided by $3.51, or about 28x earnings. Just a tad more than, say, Bank of America or Caterpillar tractor or GE. But whatever.com is growing earnings 10 times faster than those other old stalwart companies.

Is there a lot more risk that whatever.com misses its earnings numbers? Absolutely. But if it hits the $3.51 and then goes on to earn 6 bucks and then 10 bucks a share in subsequent years...the $100 a share price here will look like a bargain in the rear-view mirror.

So that’s what trailing earnings are all about. You pick a spot in time, and look at the previous, say, four quarters’ earnings, and then think about what multiple of that number the stock is trading at, and then map that to future prognostications. If the company is really growing this fast, then even though its multiple on trailing earnings might be high based on forward earnings, it might be a bargain.

Just ask Amazon about this one. They wrote the book on trailing earnings growth. And, uh…guess where you can buy that book.