For the uninitiated the term EPS will be quite a challenge to master and understand . Here is my Earning Per Share (EPS) primer for the beginners. This will help them understand the stocks and their pricing very easily. EPS is the best bet for getting hold of good stocks.
Earning Per Share is defined as any portion of a company's profitability allocated to each outstanding share. In other words EPS determines the company's profitability. For an average common man it is very important to know the EPS as it will help in making the investment decision.
EPS is calculated as : Net Income - Dividends on Preferred Stock / Average Outstanding Shares
In order to illustrate this with an example: there are two companies A and B where both of them earn $100 but company A has only 30 shares outstanding, while company B has 50 shares outstanding. Then it is important to know which company's stock you should invest? Here we will be using a comparison toll to calculate the earning per share by evaluating the net earnings and dividing by the outstanding shares.
EPS = Net Earnings / Outstanding Shares
Going by the example and the formula of the EPS above we will be able to decide which company is the best bet. Company A which has the earning of $100 and 20 shares outstanding which results as EPS of 5 ($100 / 20=5). Company B which has the earning of $ 100 and 50 as outstanding shares which equals an EPS of 2 ($100 / 50 = 2).
For making your investment decision, EPS which is a very helpful element in comparing one company with another provided they are from the same industry, but even that doesn't tell you whether it is a good share to buy or not. For this we need to have for information of some of the ratios.
Analyzing this further, we should update ourself with the other three types of EPS numbers:
# Trailing EPS - This is the actual EPS or the last year's number.
# Current EPS - These are projected this year's numbers.
# Forward EPS - These are the projected future numbers.
In calculating the EPS it becomes more accurate to use the weighted average numbers of the outstanding shares, as the outstanding shares can differ over the passage of time. Earning Per Share is known as the most important in determining the price of the share.
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