While perusing a financial news website, reading a financial magazine, or watching the financial news, you are likely to hear the phrase EPS when discussing the profitability of a given company. This may trigger your curiosity and make you wonder what EPS stands for, and whether you should care.
Simply put, EPS is an acronym that stands for Earnings Per Share.
Earnings per share is an important metric in a company’s earnings figures. It is calculated by dividing the total amount of profit generated in a period, by the number of shares that the company has listed on the stock market.
Earning Per Share is used to determine the value attached to each outstanding share of a company. On exchanges, the amount of profit made by companies and the number of shares they have listed can vary, so Earning Per Share gives a per-capita way of evaluating each business. It is also a way for analysts to compare companies to each other and see which has higher earnings figures.
To calculate a company’s earnings per share, you would first need to calculate its net profit by taking net income and subtracting any dividend payments. Then you’d divide that figure by the number of outstanding shares, which is usually a weighted average over the period.
The Earning per Share formula or EPS formula is:
Let’s say you want to buy the shares of XYZ Industries, which currently has a total net income of $900,000. If the company has 75,000 shares in circulation, this would give an EPS of $12 ($900,000/75,000).
Earning Per Share is a very important financial metric when it comes to analyzing the financial performance of a company. Many conservative investors rely on basic Earnings Per Share and Diluted Earnings Per Share information to calculate how much they think a stock is worth. Specifically, Earnings Per Share forms the basis of several important financial ratios including:
Figuring out which multiple of EPS to pay for a company listed on a local stock exchange can be tricky. Some investors set hard and fast rules, which aren't necessarily the best idea since they often don't factor in inflation, taxes, and risk, such as only paying 10x earnings for a stock. Other people pay 8.5x EPS + the expected rate of growth in EPS, a formula highlighted by legendary value investor Benjamin Graham.
Basic EPS and diluted EPS are also important because dividends are ordinarily paid out of profits. This means that if a company has an EPS of $2.00, it can't afford to pay dividends of $3.00 indefinitely. It's just not possible. Dividend investors look at the percentage of EPS paid out as dividends to gauge how "safe" a company's dividend payment is.
Understand what Earning per Share is and the EPS formula is important, but if you need help MT5 AM Broker provides some important analytic tools and access to a wide range of markets.