<h1>EPS(Earning's Per Share)</h1><h4>It is a company's net profit or earnings divided by the number of common shares it has outstanding (available shares). EPS indicates how much money a company makes for each share of its stock, &amp; is a widely used metric to estimate corporate value. A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.</h4><h4>     EPS = (Net Income - Preferred Dividends) / End of period common shares outstanding's</h4><p><br></p><p><strong>Examples of EPS Calculation,</strong></p><p>Say you have two companies, Company A &amp; Company B, that both had gross revenues of $400 million last year. If Company A had a net income of $100 million &amp; Company B had net income of $40 million, your gut reaction might be to say that company A is a better buy than company B, but here is where EPS come into play. Let's say Company A has 40 million shares outstanding, but B only has 10 million shares. Assuming neither company pays dividends.</p><p><u>Company A</u></p><p>($100,000,000-$0) / 40 million shares = $2.50 per shares(EPS = $2.50)</p><p><u>Company B</u></p><p>($40,000,000-$0) / 10 million shares = $4.00 per shares (EPS = $4.00)</p><p><br></p><p>Based on EPS, Company B is by far the better choice. This is why it makes sense to look at EPS as a comparison tool because it more fully shows theoretical values per share that a company is worth, something you can't tell with just revenue number alone.</p><p><br></p><h2>Types of EPS numbers</h2><ol><li>Trailing EPS : Uses the previous year's numbers &amp; is considered the true EPS.</li><li>Current EPS : Uses the current year's number, but are projections.</li><li>Forward EPS : Estimated EPS numbers for the following year(s) based upon the current trend.</li></ol><p><br></p><h2>How is EPS used ?</h2><ul><li>To calculate the price to earnings(P/E) valuation ratio, where E refers to EPS. by dividing a company's share Price by is earnings per share, an investor can see the value of stock in terms of how much the market is willing to pay for each dollar of earnings.</li><li>As shareholders don't have access to the earnings, Investors will compare EPS with the share  price of stock to determine the value of earnings &amp; how investors feel about future growth.</li></ul><p><br></p><h2>EPS &amp; Capital</h2><p>Two companies could generate the same EPS, but one could do so with fewer net assets, that company would be more efficient at using its capital to generate income &amp; all other things being equal, would be more efficient  at using  its  capital to generate income &amp; all other things being equal, would be a ''better'' company in terms of efficiency. ROE (return of equity) can be used to identify companies that are more efficiency.</p><p><br></p><h2>EPS &amp; Dividends</h2><p>A portion of the earnings may be distributed as a dividend, but all as a portion of the EPS can be retained by the company. Shareholders through their representatives on the board of directors, would have to change the portion of EPS that is distributed through dividend in order to access more of those profits.</p><p><br></p><h2>EPS &amp; P/E ratio</h2><p>Although it seems like a stock that costs more relative to its EPS when compared to peers might be ''overvalued'', the opposite tends to be the rule. Investors are willing to pay more for a stock, regardless of its historical EPS, if it is expected to grow or outperform its peers. In a bull market, it is normal for the stocks with the highest EPS ratios in a stock index to outperform the average of the other stocks in the index.</p><p><br></p><h2>Good EPS ?</h2><ul><li>It will depend on factors such as the recent performance of the company , the performance of its competitors, &amp; the expectations of the analysts who follow the stock.</li><li>Sometimes, a company might report growing  EPS  but the stock might decline in price if analysts were expecting an even higher number.</li><li>Likewise, a shrinking  EPS figure might nonetheless lead to a price increase if analysts were expecting an even worse result.</li><li>It  is important to always judge EPS in relation to the company shares price, such as by looking at company's PE are earnings yield.</li></ul><p><br></p><h2>Limitation of EPS</h2><ul><li>A company can gain its EPS by buying back stock, reducing the number of shares outstanding &amp; inflating the EPS  number given the same level of earning.</li><li>EPS doesn't take into account the price of the share, so, it has little to say about whether a company's stock is overvalued or undervalued.</li></ul><p><br></p><p><em>For more sophisticated in your fundamental analysis, start tracking EPS of a company to see if they are increasing or decreasing &amp; if so, at what rate.</em></p>

What is EPS and its Importance

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