EPS – Earnings per Share
EPS or earnings per share are actually the share of profit of company distributed proportionally to every outstanding share from common stock. Earnings per share or EPS acts as an indicator and indicate the profitability of company.
Earning per share is calculated by:
EPS = (Net Income – Dividends on prefered Stock)/(Average Outstanding Shares)
At the time of calculation, it is recommended to implement shares of weighted average number prominent over reporting term, as changes can be made in number of shares over a period of time. In order to measure the value of price to earnings ratio, earnings per share is the major element. It is however, considered to be a significant single variable for calculating the price of a share. Very often, one aspect is ignored in the earnings per share and that is, capital which is necessary so as to produce net income or earnings in the calculation. EPS number can be same for two companies but the company with less investment will be a better company as it would turn out to be more efficient to generate income from its capital, keeping other physical parameters the same. As a matter of fact, the investors should keep knowledge of net income manipulation as it too affects the quality of EPS number.
There are different types of earnings per share indicators being used by the companies. The two fundamental EPS indicators used today are:
1. Trailing EPS
2. Rolling EPS
Trailing EPS – it is quite easy and simple to learn and understand. It is the calculated sum of EPS of company for a year or four quarters.
Rolling EPS – it is again the sum of EPS for last two quarters and also contributes to estimated EPS for next two quarters that is, a year in a whole.
Hence, it earnings per share is a necessary tool to consider while analyzing a stock.
Written by: Matt
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