Earnings Per Share - EPS

Earning Per Share (EPS) -You Must Know

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Are you thinking of investing in a company and you are new in the share market? If the answer is positive, this is the article that will help enrich your knowledge in the world of investment. Stock exchange, market order, day order, Initial Public Offerings, earning per share, Mutual funds, Dividends, etc., are some of the most important terms to know before starting to deal with share investment in the market business. Among them, EPS is the term that determines and changes the direction of investment of the investors. It is going to enrich your shareholding knowledge by describing the necessity and importance of EPS. It would be more helpful for the newbies. In the later part, there will be an explanation of its formula and also a practicable example to understand the term clearly. Let’s start the journey to the world of investment and profit with EPS and its application.

What is EPS

EPS is a common term in the business and investing sector. EPS refers to Earning Per Share, which describes a company’s net profit per outstanding common share. It is also considered as the bottom line of a company’s profitable worth. This is a fundamental term for marketers and investors. For the newbie, it is a must to gather enough knowledge about it to do well in the investment market and stocks. The best investor among your known investors knows the importance of EPS. Before every investment, he sits with a cup of tea or coffee to investigate the companies based on their EPS. Your best investor Mr. X goes with the company having higher EPS value because he knows its importance and profitable outcome. You can also go to him and ask him to learn details about the term. Another good option for you to continue reading this article will be worth your valuable time.

Importance

The higher the EPS, the higher the profit level that can be gained from the company per outstanding common share. If the company’s EPS is downward, it is risky to invest in that company because the amount of profit would be dangerous or hostile.

Financial Strength It helps to learn about the financial strength.
Financial Trend EPS line shows past and present trending of the financial condition.
Prediction It gives a way of predicting the future ability of a company.
Effects Affects the investment making a decision.
Measuring Measures profitability per share of a company.
Determinant A significant determinant of the P/E ratio.

 

At the time of investing, the share marketers primarily look at the EPS line trend and take a decision. When the line is upward, they feel comfortable with the company because of its financial strength. On the other hand, irregular and random EPS curve lines like heartbeat patterns make the investors confused. It becomes difficult for the investors to conclude the company’s future financial ability and probable profitable per-share income. The primary importance of EPS is that it measures each share profitability of a company. It also works as an indicator of the company’s preferred dividend and is a determinant of the P/E ratio. In the P/E ratio, E puts the value of EPS.

Comparing tool

EPS is a tremendous comparing tool for comparing the companies of the same category. Undoubtedly, the company with larger EPS is more friendly to give more benefit per share than the company with lower EPS. So, comparing the situation, it becomes a general procedure for the investors to go with the company that has higher EPS to get a higher benefit share at the end of the financial year. Another primary application is understanding the financial strength of a company, ability to give benefit per share, comparing among the companies for investment, etc. As a whole, it largely dominates the decision-making procedure to invest for a company. On the other side, it is a way of determining the stock value. It determines the price earning P/E ratio. It determines the value of the stock of a company. All the resulting factors, P/E ratio, stock value, also adds more degree to the comparing processing among the companies of the same category. Hence EPS helps significantly to choose the best possible profit friendly company for investment.

Formula & Calculation

There is a universal formula used for calculating EPS for the companies.

Formula for Earning Per Share (EPS) calculation

It supports the formation of almost all of the companies. Again, many companies do not offer preferred shares. In that case, the company’s EPS is calculated only based on net income and average outstanding share. The formula becomes EPS = net income/average outstanding common shares. So, every time inquire about the preferred share, whether the company does provide it or not.

Example

Now let’s have a practicable example regarding a company name ABC Limited for a fiscal year. The company had the following financial condition in that particular year.

Net Income BDT 70 million
Preferred Dividend BDT 5 million
Average Outstanding Share BDT 40 million

 

We can put these values into the formula mentioned above to get EPS for the company for that year. For the company supporting preferred dividends we get,

EPS Example 01

Again, if the same company were not offering preferred dividends, the possible EPS would become,

EPS Example 02

Findings

EPS becomes more important when it’s time to invest. It helps to make better decisions. Comparing between two companies, it finds out the financially stronger one. It finds out the company that is more suitable for investing for getting better benefits and reliable outcomes. Without the proper knowledge of EPS, your investment may become destructive. You may fall in great loss. With adequate knowledge of Earning Per Share, you can become a successful investor at the end of the year. It is noted that it is generally calculated quarterly or yearly by the companies and organizations. Reading this article, now you may have enough knowledge about EPS to compare the companies to make a better and secure investment.

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