I ran into an interesting problem at work. I’m trying to rank companies in the S&P500 by relative EPS growth rates.
The question is how to deal w the companies that have negative EPS. The problem here is that in some cases, the classic EPS growth rate calculation, i.e. (EPSt - EPSt-1) / EPSt-1 produces an absurd result.
For example, if EPSt-1 = -10, and EPSt = -15, we get a positive growth rate: (-15 - (-10)) / (-10) = +.5! which, of course, is not right.
I can think of several possible fixes.
1. In cases where there is a decrease in EPS from an already negative EPS number, I’d take the ratio using the absolute value of prior period’s EPS, in which case my calculation becomes : -15 - (-10) / abs (10) = -.5, which works.
2. Another fix might be simply to delegate ALL companies w. losses to their own class, and rank them separately from the companies that don’t have losses.
3. Another suggestion I heard is to exclude companies w. losses in both periods entirely from the rankings.
Thoughts, anyone?
The question is how to deal w the companies that have negative EPS. The problem here is that in some cases, the classic EPS growth rate calculation, i.e. (EPSt - EPSt-1) / EPSt-1 produces an absurd result.
For example, if EPSt-1 = -10, and EPSt = -15, we get a positive growth rate: (-15 - (-10)) / (-10) = +.5! which, of course, is not right.
I can think of several possible fixes.
1. In cases where there is a decrease in EPS from an already negative EPS number, I’d take the ratio using the absolute value of prior period’s EPS, in which case my calculation becomes : -15 - (-10) / abs (10) = -.5, which works.
2. Another fix might be simply to delegate ALL companies w. losses to their own class, and rank them separately from the companies that don’t have losses.
3. Another suggestion I heard is to exclude companies w. losses in both periods entirely from the rankings.
Thoughts, anyone?