Earnings are another name for profit and are often expressed as Earnings Per Share (EPS) in reports on companies.
EPS is calculated by dividing Net Profit/Income/Earnings by Average Number Shares on offer.
Note – Data sources can use the weighted average number of shares over the reporting period, or just the number of shares at the end of the period. This explains differences between reported amounts from different sources.
For the investor, what is particularly important is steady and growing EPS over several years.
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”
“Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will be the portfolio’s market value.”
Both quotes are from Warren Buffet, and earnings was another topic that Professor John Price taught at out share-investing club Mar 20 2011.
Let’s look at some examples, such as Telstra –
2011 EPS 26.1 share price $2.92 (30 Jun)
2012 EPS 27.4 share $3.69
2013 EPS 30.6 share $4.77
2014 EPS 32 – 33 forecast and target $5.30 consensus average
Source (example) http://www.4-traders.com/TELSTRA-CORPORATION-LTD-6491518/consensus/
However there was a period in the early 2000s when their EPS GROWTH was 0.95 that is, decreasing!
Dower EDI had EPS 23c, over 10 years ago, then it grew to 59c, which is 2.57 times more, and the share price was $1.64, 10 years ago, then in 2010 price was $3.82, which is 2.33 times more, a similar growth of price to EPS.
UGL, over a 10 year period, had 6.77 times growth in EPS, and 6.98 times growth in share price.
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