Earning Per Share (EPS)
Earning Per Share (EPS) is another figure which fundamental investor look for before investing in particular stock besides ROE, PER, NTA and P/B. Earning Per Share (EPS) can be define as “The portion of a company’s profit allocated to each outstanding share of common stock”- from Investopedia. Mathematically, EPS means company’s profit divided by outstanding shares.
Company ABC is issuing 100,000 shares in the market to be hold by investors. If in a particular year, the company is making RM2,000 profit in its financial year, its EPS can be calculated by dividing company’s net earning by outstanding shares. The EPS you will get is RM0.02 (2000/100,000 = 0.02). Outstanding shares are share that can be hold by investors. Treasurery shares are not counted in outstanding shares.
Why do we need to calculate EPS? Calculating EPS does not give us any hint of a company whether it is a buy or not a buy. Others fundamental figures still need factor in before buying a stock. EPS used for comparing different stocks in the same industry. Company with higher EPS does means they are more profitable than others in same industry but not necessary a buy.
Usually, I do not look for EPS of a company. I rather look for company’s ROE, PER and profit margin. I use EPS to look for the earning trend of a particular company, whether it is in uptrend or downtrend.
EPS may not entirely useless. You may utilize EPS to calculate a company’s intrinsic value. What you need to do is to seek for justified EPS growth rate (may be based on past 5 to 10 years performance) to get its future EPS. You then discount the future EPS to today’s value. However, one important note is that EPS will be diluted by share outstanding and, therefore, its accuracy may be is a question mark.
As for me, I also don’t look at EPS much. For company’s intrinsic value calculation, I use cash flow from operation.
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Mrcoolku Reply:
August 7th, 2010 at 8:14 pm
I use EPS just to find the company trend of earning, whether in uptrend or in downtrend. I seldom find company growth rate in a particular year.
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EPS is important calculation for me in my stock picks.
It is a must for me to know the EPS of the stock or company before i start investing on it.
I usually i don’t use that formula but just find the EPS from http://www.bursamalaysia.com
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