Earnings Per Share - EPS
Comparing the profits of two companies does not make sense if they have different about of outstanding shares. For example, lets say there is company A and company B, who both earned 100 dollars. If Company A has 10 shares outstanding, while company B has 50 shares outstanding, which company would be worth more?Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the P/E ratio.
For example, assume that a company has a net income of $25 million. The company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half. What you do in order to calculate the EPS is first deduct 1 million dollars from the net income, then calculate the weighted average in order to find the number of outstanding shares.
EPS=(25 -1)/(0.5 * 10 + 0.5 *15)=24/12.5 = 1.92
The EPS would be $1.92 (24/12.5).
An important aspect of EPS that's often ignored is the capital that is required to generate the net income in the calculation. Two companies could generate the same EPS number, but one could do so with less shares. This means that this company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
Basically, look at earnings per share (EPS) as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares. Although the EPS is great as a comparison tool, it cannot tell you if it is a good stock by itself. That is why we have financial ratios such as PEG, and P/E.
Basically, look at earnings per share (EPS) as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares. Although the EPS is great as a comparison tool, it cannot tell you if it is a good stock by itself. That is why we have financial ratios such as PEG, and P/E.
BTW: There are three types of EPS numbers:
Trailing EPS – last year’s numbers and the only actual EPS
Current EPS – this year’s numbers, which are still projections
Forward EPS – future numbers, which are obviously projections
