Have you come across the abbreviation EPS in stock analysis, and wonder what this is? Then you've come to the right place.
In this article you can read more about EPS (Earnings Per Share), how it is calculated, and its importance in stock analysis.
EPS is a company's net profit divided by the number of outstanding shares. It tells us something about the profitability of the company. A higher EPS can be attractive to investors, since this can mean that the company has a high profit relative to the share price.
Although the number itself doesn't tell you everything you need to know about the quality and value of a company, EPS is useful as raw data to calculate other key ratios such as P/E and P/S.
In this article, you can also read more about the advantages and disadvantages of using EPS as a key figure, as well as other financial key figures you should consider when analyzing a company.
Whether you are a seasoned investor or a novice, understanding EPS and other key financial ratios can help you make informed decisions about your investments.
What is EPS?
EPS, or Earnings Per Share, is a financial key figure that is often used in stock analysis.
It shows how much profit a company has per share.
Investors often use EPS to compare the profitability of different companies and to assess the potential value of a stock. EPS is particularly helpful if you measure a company's development in EPS against another company in the same industry.
A high EPS generally indicates that a company is profitable, while a low EPS may indicate that the company is not performing so well financially. However, it is important to remember that EPS is only one factor to consider when evaluating a stock.
It is also important to remember that different companies have different numbers of outstanding shares, so EPS does not therefore give a clear picture of the quality and value of a company.
Therefore, you should always include other important factors such as the company's revenue, debt and general financial health when you analyse.
EPS is very useful to be able to use to calculate other important key figures such as P/E and P/S.
How is EPS calculated?
To calculate EPS, you divide a company's net income by the number of shares outstanding.
For example, if a company has net income of 100 and 50 shares of common stock outstanding, EPS will be 2 (100 net income / 50 shares).
What is a good EPS?
There is no specific EPS value that is considered "good" or "bad", as it can vary depending on the industry and other factors.
A high and growing EPS generally indicates that a company is profitable, while a low or declining EPS may indicate that the company is not performing so well financially.
How is EPS related to the share price?
A high EPS can often lead to a higher share price, as investors may be willing to pay more for shares in a profitable company.
But again, it is important to emphasize that other factors also affect the share price:
- Revenue
- Debt
- Cashflow
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Could EPS be manipulated?
EPS can be affected by a number of factors beyond how much the company's companies earn. The number of shares outstanding or the level of debt also play a role.
This means that EPS can potentially be manipulated to some extent. It is important that you carefully consider all the factors that can affect EPS when analyzing a company.
Ways EPS can potentially be manipulated
- Stock Buybacks (stock buybacks): A company can buy back shares, where it buys back its own outstanding shares from the market. This can have the effect of reducing the number of outstanding shares, which in turn can increase the EPS, as the same profit is now shared over fewer shares. You can read more about share buybacks in this article.
- Changes in accounting practices: A company's EPS can be affected by changes in accounting practices or the way it reports its financial results. For example, a company may choose to use more favorable accounting methods or make one-off adjustments that temporarily increase EPS.
- High level of debt: A company with a high level of debt may have to use a significant portion of its profits to pay off debt, which may lower its EPS. Some companies may try to manipulate their EPS by taking on more debt to fund share buybacks or performing other activities that increase EPS.
Overall, it is important that you are aware of these potential manipulations and to carefully consider all the factors that can affect a company's EPS when analyzing.
Read also: shares for beginners: a great guide to investing in shares and fund
EPS is just one of several key figures you need to look at
Although finding earnings per share is an important financial key figure, it is not the only key figure investors should consider when they evaluate a company. As mentioned, there is also no good way to identify a company's value and quality.
Therefore, you should also check out other important key figures, such as:
- Revenue: This is the total amount of money a company earns from the sale of its products or services. A company with high turnover can be more attractive to investors, as it indicates a strong demand for the company's products or services.
- Operating income: This is the profit a company generates from its day-to-day operations, after deducting operating costs. Operating income can give investors an idea of the company's efficiency and ability to generate profits from its core business.
- Return on investment (ROI): This is a measure of how a company uses its resources to generate profit. A high ROI indicates that a company manages to generate a good return on the money it has invested in its business. We like that!
- Debt to equity ratio: This is a measure of a company's financial debt, or how much debt it has in relation to its equity. A high debt-to-equity ratio can be a red flag for investors, as it can indicate that the company is taking on too much debt and may be at risk of financial instability.
Ultimately, no single key figure can provide a complete picture of a company's performance or potential value as an investment.
It is therefore important that you as an investor check out a combination of several key financial figures when evaluating a share.
Checklist of important factors
Do you want to use the same criteria as great investors like Terry Smith or Warren Buffett? Then you should check out the checklist I've made, with 7 important factors you must look for before you invest in a company.
