A consistent improvement in the EPS figure year after year is the indication of continuous improvement in the earning power of the company. Analysts, investors and potential stockholders prefer to use earnings per share ratio in conjunction with other relevant ratios.
Other matrices that are mostly considered along with earnings per share ratio to judge the justification of stock price include dividend yield ratio and annual dividend per share. Nice explanation! What is the calculation of the EPS. Remember profit and loss are shared among shareholders.. So if one company has an eps of R Also,what interpretation do I give for them. Skip to content Menu. Formula: Earnings per share ratio EPS ratio is computed by the following formula: The numerator is the net income available for common stockholders i.
Next ». What does negative EPS indicate? What is the fomula for rate of return on shareholders interest Reply. When its earnings-per-share increase, it is an indication that a company is doing well financially and may present a good opportunity for investment.
The EPS ratio on its own is arbitrary. Instead, it is best evaluated through trend analysis, by studying the growth rate of a company over time :. For the EPS ratio to be comparable between accounting periods of one company and among different companies, it must be calculated on a consistent basis. The correlation between EPS growth and shareholder value is unclear because the calculation is not directly linked to the objective of maximising shareholder wealth.
Firstly , earnings-per-share do not represent the actual income of ordinary shareholders because they do not have direct access to the earnings calculated by the ratio. And some companies pay no dividends at all. Secondly , high profit may be achieved at the expense of reinvestment back into the business to fuel future growth and sustainable value for shareholders. When a company passes profits on to its stockholders via dividends or a share buyback, it results in a short-term gain for the shareholders.
This needs to be balanced with the alternative of retaining the earnings in the company to increase shareholder returns in the long-term. Thirdly , the Earnings Per Share are not necessarily directly related to the market value of a company and its stock. Since EPS does not take account of inflation, any increase in earnings likely does not reflect the true growth.
However, profitability is only one aspect of company performance. As a result, focusing too much on the bottom line of a company is incomplete, narrow-focused and short-sighted. There is a wealth of other financial and non-financial factors that come into play when it comes to the success of a company and an investment strategy. By definition, the EPS is dependant on the number of shares in issue.
This needs to be taken into account when comparing the earnings of companies against each other. As an example, while both of these companies have EPS of 10 cents, the earnings of Company B are drastically lower:.
Moreover, the EPS calculation does not factor in the outstanding debt of a company. However, Company A needs significantly fewer net assets to achieve the same level of earnings as Company B because it is more efficient at utilizing its capital to generate revenue.
Therefore, for the earnings-per-share analysis to be truly meaningful, the ratio must be evaluated in context and with the awareness of its limitations. Here are the 5 top tips on how to do just that:.
Look for trends in EPS growth to get a sense of how profitable a company has been to date and to estimate its future prospects.
Compare the EPS to similar companies within the same industry, industry averages or other relevant benchmarks to determine how a company is performing relative to its peers.
For example, between two companies in the same industry with the same number of shares outstanding, and other things being equal, higher EPS indicates higher profitability. Furthermore, investors should use the EPS figure in conjunction with other ratios and metrics to estimate the future growth, earnings, and stock value of a company. Always analyse both the financial as well as non-financial elements to gain a holistic view of a company.
EPS is not paid out to shareholders. Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups. Emilie N. Share on facebook. Share on twitter.
Share on pinterest. Earnings per share or basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average common shares outstanding. The earnings per share formula looks like this. This is because EPS only measures the income available to common stockholders. Most of the time earning per share is calculated for year-end financial statements.
Since companies often issue new stock and buy back treasury stock throughout the year, the weighted average common shares are used in the calculation. The weighted average common shares outstanding is can be simplified by adding the beginning and ending outstanding shares and dividing by two.
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