EPS is a measure that can act as an indicator of the financial health of a company. In the event that an organization's all's benefits were paid out to its investors, EPS is the piece of an organization's overall gain that would be designated to each share remarkable.
Examiners and merchants frequently use EPS to quantify the monetary strength of an organization. It is in many cases considered perhaps of the main variable in deciding the worth of stocks. Numerous financial backers actually view EPS as a proportion of an organization's benefit. Truth be told, it's occasionally called the primary concern the last assertion, in a real sense and metaphorically, that a business is worth.
A higher EPS implies that an organization is sufficiently productive to pay more cash to its investors. For instance, an organization might build its profit as income increment over the long run.
Investors often compare the earnings per share of two companies within the same industry to understand how the company is performing relative to its peers. Investors can also pay attention to trends in EPS growth to get a better idea of how profitable a company has been in the past and understand its future prospects. A company with steadily increasing EPS is considered a more reliable investment than a company whose EPS is declining or changing significantly.
EPS is also an important variable in determining the value of stocks. This measure represents the earnings portion of the valuation's price-to-earnings (P/E) ratio. The P/E ratio is one of the most common ratios used by investors to determine whether a company's stock price is correctly valued relative to its earnings.
Types of EPS
There are actually three basic types of EPS numbers, depending on the source of the data.
EPS at the end
The EPS tracking company is based on the previous year's number. It uses the previous four quarters of earnings when calculating it and has the advantage of using actual numbers instead of projections. Most P/E ratios are calculated using EPS tracking because it shows what actually happened and not what would have happened. While the figure is accurate, lagging earnings per share is "old news" and many investors will look at current earnings per share numbers and more. We use EPS last in our Bank of America example.
Current EPS
This measure generally covers the four quarters of the current fiscal year, some of which have already passed and some of which are yet to come. As a result, some data will be based on actual figures and some will be based on projections.
EPS onwards
EPS going forward is based on future numbers. This measure includes projections for a certain period of time in the future (usually the next four quarters). Analysts, or the company itself, can make forward estimates of EPS. While this number is based on estimates rather than actual data, past earnings per share are often of great interest to investors because investing is generally based on estimates of a company's future earnings potential.
Investors often compare these different EPS calculations. For example, they can compare previous EPS (which makes future projections) with the company's actual EPS for the current quarter. If the actual EPS does not match the EPS projections, the share price may fall. On the other hand, if EPS does hit its estimates, the stock could rally.
The baseline
EPS has particular meaning when investors look at the historical and future EPS figures of the same company, or when they compare EPS of companies within the same industry. Bank of America, for example, is in the financial services sector.
As a result, EPS investors should compare Bank of America to other stocks in the financial services arena, such as JPMorgan Chase (JPM) or Wells Fargo (WFC). Since EPS is number one, it is essential to use it in combination with other performance measures before making any investment decisions.
Key takeaways
- Earnings per share (EPS) is the portion of a company's earnings that is allocated to each outstanding share of common stock.
- EPS (for company with selected and collective shares) = (net dividends – selected dividends) ÷ common shares outstanding
- The bottom line is sometimes called EPS–the final statement, literally and figuratively, that a business is worth.
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