Earnings per share (EPS) is a calculation that investors use to work out how much a company earns, for every share that they have outstanding.
It is a useful measure for investors, as it gives them an idea of how much they can expect to earn from their investment.
If a company does not earn much, in relation to its share price, then this may be a warning sign for an investor not to invest – especially if they prefer to invest in companies that are highly profitable.
Not all investors are looking for companies that are highly profitable now, instead, many investing in companies that have a lot of potential, hoping that those companies will become very profitable in the future.
For example, a startup company may deliver huge losses in the beginning, only to grow into one of the most profitable companies in the world over time.
Nonetheless, regardless of the types of companies that investors look for, the EPS calculation is a valuable metric for investors to use during their analysis of an investment. It is a quick way for them to understand how profitable a company is.
To calculate the earnings per share of a company, you just need to use the following formula.
You simply need to divide the earnings of a particular company by the number of shares that they have outstanding. This information is freely available in the annual report of the company or on free sites like Yahoo Finance.
If you do not know what the number of shares outstanding is for a particular company, then you can use the market capitalisation instead.
So, if a company earns $5m and has 500k shares outstanding, the earnings per share figure would be $10.
Luckily, the earnings per share figure of a company is usually given to you when you look up the price of a stock. It will usually be written using the acronym ‘EPS’.
Whether an EPS figure is attractive or not, depends upon the share price of a company.
For instance, an EPS of $1 might be great if the share price is $1, but it would be horrendous if the share price was $1000.
So, to weigh up if an investment is worthwhile or not, many investors will compare the stock price with the EPS figure.
There is no set rule as to what a good EPS figure is. It should ideally be positive, growing over time and meeting the expectations set out by the investor (in terms of what they are willing to accept).
At the same time, as previously stated, many investors may be willing to invest in companies that are not profitable, especially if they are likely to be very profitable in the future.
Therefore, it is important to consider what types of companies that you would like to invest in, whether they are very profitable today or potentially very profitable in the future.
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