|Earnings per share|
Earnings per share
Earning per share or EPS is considered one of the primary driving forces behind share market price. To fully understand EPS we should make mention of some of EPS's key contributors which are earnings and common shares.
Past performance or the last reported earnings are generally considered a good indicator of future performance. The issuance of shares (common or preferred) is typically the primary source of capital for corporations. This capital can then be used by the corporation to further generate wealth. Profit arising from the business can either be reinvested in the corporation or paid out to investors in the form of dividends. EPS is a ratio of the companies past performance per common share. The relationship of EPS to current market price is known as PE (or P/E ratio). Read more about [href="/?p=Fundamental-Analysis.Overvalued-and-Undervalued-Ratios&t=Price+to+earnings+(P/E)"]Price to earnings (P/E)[/HREF]
It is important to compare EPS to like type companies. Depending on the industry acceptable EPS ranges will vary. EPS is most effective when comparing the historical trend of EPS as well as comparing to companies within the same industry and approximate size.
There are of course certain factors which need to be taken into account when using EPS as a fundamental valuation. A company's asset structure has the potential to change through operations, acquisitions, issuance of additional common shares, stock options, warrants and other financial methods. This makes the historical trend of the EPS or current EPS value difficult to compare. Secondly, a company may actively influence their EPS figures to achieve forecasted EPS values. This can be done through a variety of methods like sale of assets to boost revenues, buy-back or dilution of shares to prevent takeovers, issuance of unbundled stock units, etc.
Calculating Earning per Share (EPS)
Earnings per share (EPS) = (Net income after taxes - preferred dividends) / Weighted average of outstanding common stocks