Earnings per share or EPS is one of the most discussed measures regarding stocks. Analysts often make predictions about the future earnings per share of a security. But what is earnings per share?
Earnings per share is a measure of the value of each share. Earnings are another way of saying net profit. The higher the EPS of a company, the more profit each action is worth.
Earnings per share is calculated by dividing net earnings by the outstanding shares.
EPS = net earnings / shares outstanding
Company makes $ 10 million net profit
They have 1 million shares outstanding
Their EPS will be equal to $ 10
EPS = $ 10 million / 1 million = $ 10 per share
Earnings per share tells us.
For each share of the company I own, I will receive x dollars of income a year later.
Replace x with EPS and you get your answer
If a company has a EPS of 5 – For each share of the company I own, I will receive $ 5 of income a year later.
Comparing one company’s EPS to another doesn’t tell us much.
You might think that a business with EPS of $ 5 would be better than a business with EPS of 1, but that is not how it works.
We have two companies, company A and company B
Company A has net earnings of $ 50 million and 50 million shares outstanding
Company B has net earnings of $ 50 million and 10 million shares outstanding.
Company A has EPS of $ 1 per share
$ 50 M / 50 M = $ 1
Company B has EPS of $ 5 per share
$ 50 M / 10 M = $ 5
Company B has higher EPS, but the two companies are the same. They both generate $ 50 million in profits. The only difference is the number of shares outstanding.
It is very likely that Company A’s shares are much cheaper.
A share of Company A costs $ 15
Company B shares cost $ 75 per share
If you had $ 750 to invest, which company would be best to invest in.
Company A with EPS of $ 1 per share or Company B with EPS of $ 5 per share.
For company A, you can afford to buy 40 shares
$ 750/15 = 50
For company B, you can afford to buy 10 shares.
$ 750/75 = 10
How much income will you receive from each investment?
For company A, you will buy 50 shares each generating $ 1 EPS.
For company B, you will have 10 shares each generating $ 5 EPS.
Even if company B has a much higher EPS, the return on investment is the same as that of company A.
Earnings per share can be used to compare companies when you use it as part of the PE ratio.
To learn more about the PE ratio, read my article What is the PE ratio?
Generally speaking, if earnings per share increase, the share price will also increase.
Here we can see a comparison of Apple’s EPS and stock price over the past 10 years.
Another way that earnings per share can affect the share price is due to investor expectations.
Let’s say that investors expect a company to increase its EPS there by $ 1 over the next year.
The company can only increase its share price by 90c.
This will generally cause the share price to drop on the day the results are announced.
As I said, earnings per share is calculated by dividing earnings by the outstanding shares.
This means that earnings per share can decrease in two ways.
Earnings per share will decrease if:
- Profit (net profit) decreases
- Actions increasing.
Profit will decrease if a company’s expenses increase or if its sales decrease.
Let’s say a company sells lemonade.
If the cost of lemons increases, each glass of lemonade will be less profitable.
If the business cannot attract as many customers, its revenues will decrease, which means less profit.
The company may decide to issue more shares to the public.
If this happens, it means that there are more shares to which the profits must be distributed.
There are three financial statements
- The income statement
- The balance sheet
- Cash flow statement
Earnings per share can be found in the income statement
Here is the EPS that I found on Apple’s quarterly income statement.
To find a company’s income statement, you can go to a website such as Yahoo Finance or Morningstar.
Alternatively, you can go directly to the companies’ websites and download their quarterly or annual reports.
- Earnings per share is a measure of the value of each share.
- EPS = net beneficiary shares outstanding
- For each share of the company I own, I will receive X dollars in revenue a year later.
- EPS alone cannot be used to compare two companies
- Use of EPS in the context of P / E ratio can allow us to compare two companies
- EPS and share prices are closely linked
- People’s expectations about the growth of BPA can affect the stock price.
- BPA may decrease if revenues decreases or if Shares outstanding increases
- The EPS is on the revenue collection.
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