An investor in shares usually looks for either or both of 2 things –
1. To earn a dividend (share of the profit) or
2. Sell them at a higher price in future.
Earnings Per Share (EPS) analysis and how investors use EPS figures/ratios are very important for actual and potential investors because the payment of a dividend and increase in the value of shares in the future largely depends on the earnings of the company.
EPS is calculated by dividing Net Profit/Income/Earnings by Average Number Shares on offer. For detail and example on the calculation see HERE.
A higher earnings per share ratio can help the share price of a company rise, for real Australian share examples see our post HERE.. EPS is one of the most widely quoted and relied-on figure by investors. In most of the countries, listed public companies are required to report EPS figure on the income statement. It is usually reported below the net income figure.
There is no rule of thumb to interpret earnings per share. The higher the EPS figure, the better it is. A higher EPS is the sign of higher earnings, strong financial position and, therefore, a reliable company to invest money.
For a meaningful analysis, the analyst should calculate the EPS figure for a number of years and also compare it over those years, as well as with the EPS figure of other companies in the same industry. A consistent improvement in the EPS figure year after year is the indication of continuous improvement in the earning power of the company. So a growth in EPS can be a stronger indicator – and above 7-9% shows a company growing profits and managing resources/assets well.
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