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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