Earnings per share (EPS); An important fundamental indicator used in stock market

 

 Earnings per share (EPS) is a fundamental indicator used in financial markets, which measures the earnings value of each outstanding share of Company's common stock. It is considered as an indicator of company's profitability. It is calculated by dividing net income (net profit) by the number of outstanding common shares. You can find the EPS of the companies in their consolidated results and income statement. By multiplying EPS with outstanding shares you will get the company's income.

Earnings per share (EPS) Formula

Basic earnings per share can be calculated by using the following formula



 For example, If the net profit of the company 'XXXX' For the financial year 2013 is 100,000,000,000 and the average number of common shares of the company is 33,000,000,000, then EPS can be calculated as
EPS= 100000000000 / 33000000000= 3.03 = 3

There is not much difference between net profit and net income. So some people use this formula as

   Earnings Per Share (Weighted) Calculation

Weighed earnings per share is more reliable than basic earnings per share. It is calculated by making some changes. It excludes the amount of dividend paid by the Company to its share holders.

Now the formula becomes,

 For example, If the net income of the company 'XXXX' For the financial year 2013 is 100,000,000,000 dollars, the average outstanding number of shares of the company is 33,000,000,000 and the dividend paid to its share holders is 11,000,000,000, Then weighed EPS can be calculated as
EPS= 100000000000-11000000000 / 33000000000= 2.69 = 2.7

Uses of Earnings Per Share (EPS)

Like other fundamental indicators, Earnings per share is also considered very important while buying securities. It must be considered with other indicators such as Price-to-Earings ratio, market capital, share prices, dividends, liquidity and the company's long term financial outlook. Among them the first priority goes to EPS, because it gives us an idea of profitability of the company. Higher EPS indicates higher profitability. But we can't say above or below a fixed range of EPS a security is a buy or sell. It depends upon market condition and sentiments. So a trader or investor must consider the EPS of other companies of the same sector before considering a buy.

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Price-to-earnings ratio or PE; An equity evaluation tool for stock market investors

 The price-to-earnings ratio, which is commonly known to us as P/E ratio, often called P-E ratio or PE is used to calculate the value of equities through relative evaluation. In other words it is an equity valuation multiple and the valuation ratio of a company's current share price compared to its earnings per share (net profit). It is the most simplest and common method used for valuation.
It can be calculated by using the following formula




 Suppose, the shares of the company 'XXXX' is trading at 975 Rupees (per share) and the earnings over last one year was 45 Rupees then PE ratio is 21.7
 Different methods are used to calculate PE depending upon the type of earnings.
 'Trailing PE' or 'historical PE' is calculated by using the net income for the most recent one year (last four quarters or two half years) divided by the weight-age average of common shares in issue during this period. It is the most common form of PE.
 'Trailing PE from continued operations' uses operating earnings only to calculate PE. That means earnings from discontinued operations and extra ordinary items are excluded from calculation.
 Another form of PE is called 'forward PE' or 'projected PE' or 'prospective PE', in this method estimated net earnings (published by a selected group of analysts) over next one year is used to calculate PE.

Features of PE

 Higher PE ratio indicates that the company may get higher growth in earnings compared to the companies with lower PE.
 As I said above it is an equity valuation multiple. For example, If the PE ratio of a security is 25, it means that people are willing to pay 2500 RS for a company whose earnings per share is 100 Rupees.
A security with an average PE of 20-25 is considered as a good one. Above that the stock is not advisable.
 Comparing the PE ratio of the companies in the same sectors are useful. The PE ratio of its sector and the whole index may also help investors to identify whether the security is expensive.
 The companies which bear losses do not have a PE ratio.

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William's %R; Calculation and how to use in financial markets

In previous posts we have discussed about  some important technical indicators used in stock markets such as fibonacci levels, moving averages, stochastics and bollinger Bands. In this topic let us try to learn about 'Williams %R'. Like 'Stochastic Oscillator', Williams %R is also a momentum indicator used to  measure overbought and oversold conditions in financial markets. It is the inverse of the Fast Stochastic Oscillator. This method was developed by Larry Richard Williams, an American author and commodity trader.
 'Williams %R' is also called '%R', which shows the current closing price in relation to the high and low of the past N days* (usually 14 days). It is used to know where the financial markets are trading, near the high or near the low, or somewhere in between high and low, of its recent trading range. In other words it is used to calculate the entry and exit points. The values are from '0' (zero) to '-100' (minus hundred). Above '80' it is considered as oversold and below '20' it indicates over bought.

According to the rule a security or financial instrument is considered as a good buy when the following conditions satisfy,
1. '%R' touches -100%
2.  Then wait for 5 days after -100% reached
3.  When '%R' once again rises above -95% to -85% levels it is a buy.
 A security or financial instrument is considered as a good sell if the following conditions satisfy,
1. '%R' touches 0%
2.  Wait for 5 days after 0% reached
3.  When '%R' once again falls below -5% to -15% levels it is a sell.

'Williams %R' is calculated by using the following formula.

%R = (high of look-back period- current close / high of look-back period - low of look-back period) * -100 

A chart showing William's %R levels is given below.

A spreadsheet showing 'Williams %R' levels is given below.

* Instead of days you can use weeks or months to calculate medium term to  long term over bought or over sold conditions and buy or sell signals.

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