What does Earning Per Share mean? How to use Earning Per Share to gauge if a stock is worth buying?

Answer 1

ACLS, a dog I just got away from (probably just as it starts a climb to regain lost ground, like what happened to me with GLW a few years ago), has about 101.6 million shares. At the end of last year it had net earnings after taxes of $40.7 million. That means it earned about 40 cents per share. The price when it was announced was close to $6 per share. That made the PE around 15 (divide the price by the earnings).

The first issue, a positive number for a PE means the stock makes money. A low PE means that the stock, in regard to the company's earnings, is relatively cheap. I high PE means that it is either bid up on greater expectations (meaning the price is expect to rise because earnings are expected to rise) or are the tail feathers of a crash and burn (price is still too expensive for the earnings? Then the price will have to fall until something more reasonable results). It isn't a foolproof guage, but then neither are earnings reports. My company announced that it made money, but wiped out five months worth of price appreciation (maybe they figured things were as good as they were going to get) at the open of one day. The same day several companies announced losing numbers, but their stocks rose. The market is fickle, so don't peg real money on only one or two indicators, okay?

Answer 2

Earnings per Share or EPS is defined as the total amount of net earnings generated by the company divided by the number of shares outstanding. So for the sake of argument let's say a company generated $15 million in net earnings and they have $15 million shares outstanding then EPS = $1/share. EPS is a good way to measure if a company is profitable. As an investor you want to see a company that is steadily growing the EPS. Now keep in mind you need to be aware of how the EPS is being grown. Often times a company may have bought back shares and it can appear that earnings are growing faster than they really are because they are being measured by a smaller denomenator, so the company may not have increased earning they are still generating $15m in income but they bought back 5 million shares of stock so now EPS is $1.50 an increase of 50%, but not really because the denomentor is smaller. Share buy backs are typically considered positive, but I know I grow concerned if it is something they do often and earnings are not growing. Another good way to determine if a stock is worth buying is to look at Price to Earnings ratio (i.e. the stock price divided by the earnings per share). A low P/E indicates a stock that is trading at a percieved discount to the market. P/E and EPS are typically judged in comparison to their industry peers or an industry average. I should also note depending on the corporate industry or the type of stock (i.e. growth or value) the numbers will look differently. Google is considered a growth stock and has a P/E OF 41.1, growing earnings per share at 11.17%. If you buy google you are buying on the growth, betting that it will continue to grow earnings at a rate greater than 11.17%, thus making the P/E irrelevent. If you are buying a stock like GE, which is trading at a P/E of 18.16x and has EPS of 2.02% then you are buying the stock because you believe the P/E indicates it is cheap, and will go up. These should not be the only measures you use when evaluating a stock, but they are a good place to start.

Answer 3

Earnings per share is the net amount of accounting profits a company has earned during an accounting period. Most companies record revenue on an accrual basis. Not when the cash is recieved but when it is effectively earned. So, their profits are accounting profits, not cash.

Earnings per share are usually calculated on a diluted basis. That includes all securities that can be converted into stock, such as bonds and preferred stock, and it includes the value of stock options that are unexercised.

By itself you reallly cant gauge a stocks value by its net EPS for one accounting period.. There may be one-time gains or write-offs included in the EPS for an accounting period. You have to adjust for those one-time events and then look at how earnings are growing over a period of time; the growth rate of those earnings. And then project a growth rate into the future.

Answer 4

Earnings per share represent the theoretical amount of profit that one share of a company earned over a certain time period. Usually Earnings Per Share (EPS) is calculated on a trailing twelve months basis.



Earnings per share are calculated as follows:

After tax earnings of the Company / Shares Outstanding




After tax earnings of the Company is a standardized number that serves as a proxy for the economic income a firm generates during the course of its fiscal year. It is in essence the 'profit' the company has made during the year. In the US, we follow US GAAP (Generally Accepted Accounting Principles).

Shares represent ownership in a company. A firm can have many shares or few. Multiplying the number of shares outstanding by the stock price results in the the Market Capitalization of the company--the theoretical price the market is placing on the entire company.

Therefore, the prior equation is simply taking the pie of what the company earned over the year divided by the many slices of individual shares. This will give you how much money a one share ownership stake earned on a dollar basis over the given time period.




The second part of your question is more difficult to answer. Earnings per share is a useless number by itself. EPS of $5 may seem alot, but it is puny if the stock price is $1000. In contrast, EPS of $0.30 is awesome if the stock price is only $1.

Although the earnings a firm generates technically does not go to your bank account, you can see that in the first case you paid $1000 to get $5 for the first year. On a percentage basis, this amount is 0.5%--Not too great considering that current returns on money market accounts are near 5% a year. In the second theoretical case, you are 'receiving' 30 cents on your $1 investment-- a remarkable 30% return in a year.

This brings up the concept of Price to Earnings (P/E). This number is simply the price of the stock divided by the EPS. I'll leave you to ask about that or read about it elsewhere.

One warning: earnings are not like bank yields and are not guaranteed. Simply because a company has earned money in the past does not mean that it will continue to do so in the future. Look at the US auto industry today and you can easily see this to be true. Also, although that amount of earnings is technically the amount your share has earned for you, you actually do not get it. The earnings flow to the company's bank account and they can choose to either distribute it in dividends or use it to further grow the company.

Answer 5

Earnings per share = Net Income/Number of shares outstanding.
Suppose a company has a Net Income of $1million with 2 million stocks outstanding then Earnings per share or EPS= 1/2 = 50 cents.
If the company declares a dividend of 30% on this each share holder will get 15 cents.
If the company has a sales growth rate 'g'of say 10% and and return on equity Ks of 20% on year 2 then price of the stock today can be got from the formula.
d1/(ks-g)=0.15(1.1)/(0.2 - 0.1).= 5.5.
In fact the stok value is calculated using a process called 'dividend discount model which is slightly involved and since your question is regarding eps I leave it alone. The examples were given to expose the relevence of eps in stock trading and valueing.