- Understanding the term Earnings per share of the company: Earnings per share (EPS), a relative term also called net income per share, is the amount of money each share of stock would receive after distributing the profits to the outstanding shares at the end of the financial year. Thus, a larger company will have to share its earning amongst many more shares of stock compared to a smaller company. The investors, gauge the profitability of a company before buying its shares, often use this financial tool. The higher the EPS of a company, the better are its profitability as the EPS is directly dependent on the profits of the company. This ratio is extremely useful because it gives the investors a quick look into a company’s earnings growth yoy. This tool also gives the investors a clearer picture of earnings relative to dividends, as these appear on a per share basis. It is to make use of the weighted ratio, while calculating the EPS, as the shares outstanding can change over time. Overall, when a company will be growing its earnings per share, along with rising revenue and profit each year, that company’s share price will eventually rise over time. Generally, an analyst analyzes the growth of earnings per share over five years. They will also compare the EPS of a stock to its peers and the sector average. Earnings per share also reflects the ability to interepret the financial strength of the company.
- Meanwhile, if the company goes for share buybacks (buying back shares from shareholders), then earnings per share of the stock will rise virtually since it reduces the number of shares on issue.
- On the other hand, during capital raisings which comprises of issuing of new shares, rights issues, institutional placements, bonus shares and the like, results dilution in equity because the earnings of the company have to be divided by more shares.
- Additionally, the earnings per share gets the limelight when the company announces their latest earnings report when compared with the company's earlier preliminary announcement of projected earnings. Companies generally gives the projections of the future quarters before hand and if the projected earnings of the analysts’ is less than the company's EPS declared, the financial press exclaim that the company's earnings has "beaten estimates”. This often boosts the share price, at least temporarily. However, if an actual EPS that is below the projected estimate may indicate a company is amidst some trouble and their stock plunges. A company that delays its EPS announcement is usually seen that they are already in trouble.
- Limitations of earnings per share: In isolation earnings per share does not mean a great deal and can be used as just one component of the investor’s analysis. Further, there are various reasons why a rise or fall in EPS are misleading. A company’s EPS could also be affected due to the economic factors of the country, which is beyond the company’s control and also affects other companies
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