Earning
per share or EPS is considered one of the
primary driving forces behind share market
price. To fully understand EPS we should make
mention of some of EPS's key contributors
which are earnings and common shares.
Past
performance or the last reported earnings
are generally considered a good indicator
of future performance. The issuance of shares
(common or preferred) is typically the primary
source of capital for corporations. This capital
can then be used by the corporation to further
generate wealth. Profit arising from the business
can either be reinvested in the corporation
or paid out to investors in the form of dividends.
EPS is a ratio of the companies past performance
per common share. The relationship of EPS
to current market price is known as PE (or
P/E ratio). Read more about Price
to earnings (P/E)
It
is important to compare EPS to like type companies.
Depending on the industry acceptable EPS ranges
will vary. EPS is most effective when comparing
the historical trend of EPS as well as comparing
to companies within the same industry and
approximate size.
There
are of course certain factors which need to
be taken into account when using EPS as a
fundamental valuation. A company's asset structure
has the potential to change through operations,
acquisitions, issuance of additional common
shares, stock options, warrants and other
financial methods. This makes the historical
trend of the EPS or current EPS value difficult
to compare. Secondly, a company may actively
influence their EPS figures to achieve forecasted
EPS values. This can be done through a variety
of methods like sale of assets to boost revenues,
buy-back or dilution of shares to prevent
takeovers, issuance of unbundled stock units,
etc.
Calculating
Earning per Share (EPS)
Earnings
per share (EPS) = (Net income after taxes
- preferred dividends) / Weighted average
of outstanding common stocks
Also
see:
