We often come across the term EPS(Earnings per share) in the television channels when the companies report their quarterly/annual reports. Lets see whats exactly is EPS
Earnings per share = (Net Income - Dividend paid) / Outstanding shares
Where Outstanding shares = Total number of shares held by the investors. This is referred to as Capital stock in the company balance sheet.
EPS can be used as a comparison tool for evaluating companies. However we should compare EPS of companies in the same domain and not across various sectors.The decision to buy a company's share should not be totally dependent on one technical parameter. It should be based on collection of all technical parameters.
Instead of comparison of two companies by comparing their net income , comparing their EPS would give a more better comparison in terms of efficiency of the company to generate profit for each share that the investor holds.Two companies may have same net income,but one might have a higher EPS, because it has used less number of shares to generate that income.Given that net profit of two companies are same, the one with a higher EPS is better for investment.
There are three types of EPS reported.
Trailing EPS = Net profit for the last financial year/outstanding shares.
Current EPS = Estimated profit for the current financial year/outstanding shares.
Future EPS = Estimated profit for the upcoming financial year/outstanding shares.
When the company splits the stock bases, say from a face value of Rs 10 to face value to Rs 1,the EPS of the company would also get adjusted.
EPS is used in measuring PE ratio,which is again much discussed technical parameter.We shall see this in detail in the next blog entry.