EPS is considered to be the single most important variable in determining a companies share price.
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.
The most important thing in finance is “time”. When are the transactions going to be paid? That`s because the world it changing, so are the currency and the value of the money.
So, it is very important to compare apples to apples. Otherwise, it will be difficult to make an investment decision. It`s meaningless to compare the price of two different stocks.
It doesn`t make sense to compare the earnings of two different companies either. Why? Because, like I said in my article: “Earnings per share 1”, all the companies have different number of outstanding shares. This is important to know.
Let`s say Company Company A and B both earn $1000, but Company A have 10 shares outstanding and Company B have 100 shares outstanding. See? What company do you want own?
It`s better to compare two different companies by looking at the earnings per share (EPS). A simple tool to use. You calculate earnings per share by taking the net earnings and divide it by outstanding shares.
EPS = Net Earnings / Outstanding shares
In our example, Company A had earnings of $1000 and 10 shares outstanding. EPS for Company A is 100. (1000/10=100).
Company B also had earnings of $1000 but 100 shares outstanding. EPS for Company B is 10. (1000/100=10).
Wow! Buy shares in Company A you say. Maybe, but it is not enough to make that decision only on the basis of its EPS. It`s helpful to compare two companies, assuming they are in the same business, but it doesn`t tell you whether it`s a great stock or not. It doesn`t tell you what the market think of the stock either. We need to look at some ratios.
Keep in mind that there are three types of EPS:
Trailing EPS – last year’s numbers (the only actual EPS)
Current EPS – this year’s numbers (still projections)
Forward EPS – future numbers (obviously projections)
I have tried to make this as easy as possible, but if you want, we can make it more difficult. We need to remember diluted shares, dividende, warrants and so on. I am not gonna write about that today, so hang on, we will discuss that later. I just don`t want to complicate it now.
News today: FED Chairman Ben Bernanke speaks today at 7:00pm.
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