Understand what is earnings per share: We are often provided with information on record-breaking revenues and profits achieved by companies. But have you ever wondered that if you invest in a company how much of this profit pertains to this single share? Enter EPS! Today we take a look at what exactly an EPS is, its merits and demerits, and how exactly we can use it!
Earnings Per Share’s Definition
EPS is the profit earned per share by a publicly listed company. It is calculated by dividing the net profits by the total number of common stocks. EPS determines the profitability of a company. A Higher EPS indicates better profits and performance.
EPS = Net Income – Preferred Stock Dividend / Average Outstanding Shares
Apart from the EPS, there are other important terminologies as well that a stock market beginner should know. Watch the below video to know them –
Importance of Earnings Per Share
- It determines the profitability of the company to potential investors. EPS is a prime concern for investors to determine if a stock is viable. Better profitability would mean the growth of the company is positive and dividends would increase in the future.
- Comparability – Using EPS, investors compare company performance with their competitors, which shows clear signs of its performance. This information is vital to making an informed decision before investing.
- Current and future valuation of stock is determined using EPS as one of the determining factors. The P/E ratio is dependent on the EPS value disclosed by the company.
- Past Performance Indicator – The timeline of a company’s previous performance is seen through EPS generated in previous years. It shows the consistency and stability of the company.
ALSO READ: What Is An IPO & How Does It Work?
What is Earnings Per Share: Limitations
- Companies can manipulate EPS by buying back their own shares or reverse splitting stocks. This creates an impression that EPS is higher than the actual number.
- EPS is independent of the share price. It does not take into account the actual value of the company shares.
- The debt of a company is not taken into consideration when deciding EPS. It only shows a partial picture of the financial position of the company.
To sum up, what is earnings per share, it is an important decision-making input for investors. The financial viability of the stock and its comparison with competitors in its industry are determined through EPS. Simultaneously EPS also has its flaws. When choosing a stock to invest in, EPS is a single criterion among other factors to consider before making an informed decision. Refer to Trade Brains Portal to see the examples of EPS.
While it is undeniably important, it is better to get complete information about your investment. Let us know what you think in the comments below and do share it if you find it interesting.
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