MASTERCLASS Investment – What is EPS – Earnings Per Share Ratio?

MASTERCLASS Investment – What is EPS – Earnings Per Share Ratio?

Investment – What is EPS – Earnings Per Share Ratio?

Earnings Per Share (EPS) is a measure of the company profit compared to the shares of its common stock. The result serves as an indicator of a company’s profitability. It is common for a company to report EPS that is adjusted for extraordinary items and share dilution – the higher the EPS, the more profitable the company is considered, as investors will pay more for a company with higher profits.

Profit

EPS =   Number of Shares

(Company Profit divided by the number of shares)

EPS shows how much money a company makes for each share of its stock. A higher EPS usually means more value, as investors will pay more for a company with higher profits.

As an example, consider two companies

The first has Net Income $7.6 Billion, shares issued 3.98 Bill, EPS = 7.6/3.98 = $1.91

The other has Net Income $3.05 Bill, shares issued 0.599 Bill, EPS = 3.05/0.599 = $5.09

Comparing these two, the EPS is more valuable when comparing companies in the SAME INDUSTRY.

Also, we need to consider the CAPITAL that is required to generate the earnings (net income) in the calculation. 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 and, all other things being equal, could be a “better” company in terms of efficiency. A metric that can be used along with EPS, to identify companies that are more efficient is the return on equity (ROE).

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

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