EPS (Earnings Per share): EPS or Earnings per shares is one of the important financial measures in stock market. It usually indicates the profitability of a company. If the Earning per shares is advancing YoY then it’s a good indication for the company’s growth.
EPS is an important tool most of the investors or market Gurus use very frequently to understand profitability of a company before buying it’s stakes.
In simple words, we can call it as a share of a company’s profit that is distributed to each share (of the stock).
We can easily calculate the EPS of a company by dividing the company’s net income with its total number of outstanding shares.
EPS or Earnings per share can be calculated in the below ways.
Earnings per share :
Net Income after Tax/Total Number of Outstanding Shares
Weighted earnings per share :
(Net Income after Tax – Total Dividends)/Total Number of Outstanding Shares
It is advisable to use the weighted average shares outstanding (for calculating EPS), as the number of shares (outstanding) can change over time.
By considering EPS of a company, an investor can get an idea about the future growth of the company by connecting with it’s P/E ratio.
Basic Earnings Per Share (of a company) is the company’s profits divided by the number of shares outstanding. This is usually calculated on both an annual and quarterly basis.
Consider a company with earnings of 100 million, 50 million shares of stock issued and outstanding. Therefore, its basic EPS would be 2.00, because 100 million profit divided by 50 million shares = 2.
Diluted EPS (of a company) is the same concept, except for the shares outstanding figure. This adjustment is to include shares that the company holds. This could issue to investors in the future.
If a company has a significant amount of potential dilution hidden in the books, the “real” or EPS figure is lower, considering the basic EPS figure in profitable years. This is because the company’s net income would need to be split by more shares. Many investors also have interest in a company’s diluted EPS.
Another way of using Earnings per shares is to compare the EPS of the other companies falling under same sector. Example, we can compare EPS of GMCG companies like HUL, Dabur, ITC, etc. For the reason to make a more informed and to take prudent investment decision. Furthermore, the higher the EPS of a company the better is the chance of its profitability