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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What is Initial Public Offering (IPO); Definition and importance

The term Initial public offering (IPO) refers to the first issue (sale) of the shares of a private company to general public on a securities exchange. It is the stock market launch of the company. IPO's are issued by the companies to expand their capital, equity base, prestige and public image. Along with smaller, younger companies large private companies also issues IPO's. By this process a private company transforms to a public company.
 The company which sell shares not require to repay the capital to public investors. When the shares trade in open market, money passes through public investors.
The company which sells shares, only can make primary offering or Initial public offering.The conductors of IPO's are usually investment banks.
 According to the Securities act of 1933, the process of IPO starts when the company files a registration statement with Securities and Exchange Commission (SEC). Then after proper investigation Securities and Exchange Commission approves the disclosure. After getting approval from Securities and Exchange Commission, price and date of IPO are fixing.
 Investment in an Initial public offering is risky. It is mainly because the prediction of initial day's trade is very difficult.  As it is speculative, only Speculators with risk tolerance are advised to buy IPO's.

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Short term, Mid term and Long term stock trading

Short term

 Short term trading is an integral part of delivery trading.Trading of shares done from three days to six months is called short term.It depends upon Company news, reports, consumer’s attitudes and results.It is very risky and unpredictable due to the volatility of stock markets.
It is possible on future and options also in which the time duration is a few days to weeks.
 The trend of the stock is very important in short term trading.Chart pattern, Exponential Moving Average (EMA), Simple Moving Average (SMA), Moving Average Convergence-Divergence (MACD) and Relative Strength Index (RSI) have important role in short term trading.Pivot points, Camarilla levels, fibonacci retracement levels, fibonacci pivot levels, wave levels are also used to predict the short term trend.After realizing the trend one can buy or sell stocks. 

Mid term

 Mid term or medium term indicates intermediate investment.Analysts and traders have different opinion about the period of mid term.One intraday trader who holds the stocks for three to four weeks may consider this period as mid term.One long term trader who hold the stock for one to three years may consider this period as mid term.Most analysts and traders are of the view that share trading done from six months to less than one year is mid-term.Mid-term trading is also based on news and company performance.One may do the medium term stock selection on the basis of momentum and the fundamentals of the stocks.One may enter the trade after a break out above resistance or a break down below support according to his own trading system.As on Short term trading Chart patterns, Moving averages like EMA and SMA, MACD, RSI and other technical levels affect the trend.

Long-term

 Usually share trading done after one year is called long term trading or long term investing.Company's fundamentals, performance, news and market conditions affect long term trading.Buying under priced stocks with strong fundamentals (Value investing) work in long term trading.In long term trading small-cap and mid-cap stocks offer high profits than large-cap stocks.It is because small cap and med cap stocks earnings can grow easily than large caps.Growth rate and estimated returns are great concern while purchasing shares on a long term basis.

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