Earnings Per Share (EPS) refers to the earnings of a company per share of common stock during a specific period. In stock investing, EPS is an important financial indicator that helps investors assess a company’s profitability and the value of each share of stock.
Simply put, EPS represents the net profit earned by the company per share of stock.
The calculation of EPS involves dividing the company’s net profit by the total number of outstanding common shares. For example, if a company achieves a net profit of $10 million in a year and has 10 million outstanding common shares, the EPS of the company would be $1.
EPS is one of the key financial indicators in stock investing as it provides insights into a company’s profitability and the value of each share.
Generally, a high EPS indicates a strong profitability of the company and higher value per share, attracting more investors. Conversely, a low EPS may suggest weaker profitability and relatively lower value per share, leading to reduced investor interest in the company.
Here’s an example:
Let’s assume a company has a net profit of $100 million in a fiscal year, and it has 100 million outstanding shares. In this case, the EPS of the company would be $1 per share.
This means that if you hold one share of the company’s stock, it has generated $1 of earnings for you during that fiscal year. A higher EPS indicates that the company has generated more earnings for you with the same quantity of shares.
However, it’s important to note that EPS is not the sole indicator for evaluating the value of a company.
Investors need to consider other factors such as company growth, market competitiveness, management capabilities, and more to make comprehensive investment decisions.
In addition, when it comes to EPS, you should also consider the following:
- EPS trend:
It’s essential to pay attention to the trend of a company’s EPS, whether it is increasing or decreasing. If a company’s EPS has been consistently growing over several quarters or years, it is generally considered a positive signal.
Conversely, if the EPS continues to decline over multiple quarters or years, it may indicate that the company is going through a challenging period or facing some issues.
- Absolute value of EPS:
The absolute value of EPS helps investors assess a company’s profitability. A higher EPS indicates stronger profitability, while a lower EPS suggests weaker profitability.
- Comparison with industry peers:
It’s important to compare a company’s EPS with that of its industry peers. If a company’s EPS is higher than the average level of its industry peers, it may indicate that the company is in a leading position within the industry.
- Comparison with stock price:
One can also compare a company’s EPS with its stock price ratio, known as the Price-to-Earnings (P/E) ratio.
A lower P/E ratio implies that investors can potentially gain more earnings as the stock price is lower than the company’s earnings per share level. Conversely, a higher P/E ratio may suggest that investors need to pay a higher price for an overvalued stock.
