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.
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.
1) Earnings per share :
Net Income after Tax/Total Number of Outstanding Shares
2) 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.
Another smart way of using EPS 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. in order to make a more informed and to take prudent investment decision. The higher the EPS of a company the better is the chance of its profitability