EPS or Earnings per share is what value investors will always look into. Earnings per share is basically the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.
Why EPS Is Important?
EPS Growth is an important measure of management performance because it shows how much the company is making money for it’s shareholders. Hence, you can see such financial terms in the annual report. Note that changes in profit or issuance of new shares can affect EPS.
So what does EPS actually tells you? The higher the EPS is, the more money your shares of stock will be worth. Higher EPS will make investors being more willing to pay more for its higher profits.
How To Calculate EPS?
Subtract the preferred dividends paid from the net income. This will tell you the total earnings available to common shareholders.
Divide the earnings by the number of outstanding shares listed on the balance sheet. This will give you the EPS which can be used in year-end financial statements.
Earnings Per Share Vs Diluted Earnings Per Share
EPS is calculated based on a company’s outstanding common shares into accounts where diluted EPS considers all convertible securities as well. Such convertible securities can turn into common stocks and resulted a lower earnings per share. Hence, diluted earnings per share is usually lower than its basic earnings per share.
What Is EPS Ratio
EPS ratio measures how many dollars of net income have been earned by each share. dividing net income less preferred dividend by the number of shares of common stock outstanding during the period. If a company has a high ratio, it means that it can potentially generate good dividend for investors or reinvest in their business to fuel future growth. Either way will provide a positive impact to the investors. A consistent improvement in the EPS year after year implies that the growing earning power of the company.
Value investors pay attention to earnings per share because it is good to receive consistent dividend and/or an increase in the value of stock equity. This largely depends on the earnings of the company.
If you ask me how to intepret earnings per share. I will just look at its EPS Growth figure over 3 or 5 years period. A higher earnings per share is the sign of higher earnings or with strong financial position. If a company is strong in its financial standing, it will be stable and pose for future growth. Can consider to buy such stocks if other value investing metrics are acceptable as well.