You would have come across ‘EPS’ while watching the stock market. This widely-watched financial measure is key to determining the quality of a stock. Let’s decode all the fundamentals you need to know before comparing EPS for different listed stocks.
What is EPS?
EPS or Earnings per Share is a market prospect ratio that indicates the earnings of a company from each share. It is a straightforward method to determine the company’s profitability and gives accurate results when calculated in conjunction with other metrics. EPS is widely watched by investors and analysts and is ideal for researching and analyzing the best stocks. In other words, EPS can be defined as the money that each stock share would get if the profits of the company were to be distributed to shareholders at year-end.
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Just using its absolute value, an investor cannot make a judgement about whether it is a good or bad EPS.
How to calculate EPS
The basic formula for calculating EPS is as follows:
(Net income of the company – Preferred dividends) / Number of outstanding shares of the company
Net income = Amount of money left over in the company’s reporting period post deduction of cash and non-cash expenditure.
To calculate EPS for a company, you will need to dive into the company’s public filings which are provided in the quarterly Forms 10-Q and 10-K
A simple example
To perform a basic EPS calculation for a stock, let’s consider the Asian Paints stock ASIANPAINT. Assume the net profit of ASIANPAINT to be INR 574 Cr for the latest fiscal year. Now assume they had 959,20,000 (959.20 Mn) outstanding shares. By analysing ASIANPAINT’s balance sheet, if we discover 0 dividends, application of the above formula would result in
EPS = (5,74,00,00,000 – 0) / 959,20,000 = 59.84
Types of EPS
EPS calculations are broadly classified into three main categories
- Trailing EPS: It is calculated based solely on the previous year’s figures for the company.
- Current EPS: This value is based on the company’s current projections along with the available figures.
- Forward EPS: This value depends on the company’s anticipated future projections and estimated figures.
There are many different types of EPS calculations including
- Basic EPS: The basic EPS is derived using the simple calculation:
(Net income of the company – Preferred dividends) / Number of outstanding shares of the company - Diluted EPS: This accounts for all potential outstanding shares. It takes into account the company’s convertible securities. The formula for calculating the diluted EPS is as follows:
Diluted EPS = (Net income – Preferred Dividends) / (Common Shares + Diluted Shares)
- Adjusted EPS: Adjusted EPS is the EPS calculated using a net income figure adjusted for one-time expenses and profits.
- Reported EPS, also known as GAAP (Generally Accepted Accounting Principles) EPS: This is an EPS variation disclosed in the company’s SEC (Securities and Exchange Commission) filings.
- Ongoing EPS, also known as Pro Forma EPS: This is an EPS variation based on ordinary net income.
- Retained EPS: Retained EPS is the profit held by the company rather than being distributed as dividends to shareholders
- Cash EPS: Cash EPS provides the exact cash amount earned.
- Book Value EPS: Using the Book Value EPS, investors can calculate the aggregate company equity in each share.
What’s in it for investors?
Determining the EPS will help investors understand which company has higher profitability over others since a higher EPS indicates higher profitability.
- Using the EPS value, investors can zero-in on the absolute profitability of the company.
- It’s also used to calculate the P/E (price-to-earnings) and the PEG (price-to-earnings growth) valuation ratio.
What makes for a good EPS?
A good EPS is one that achieves a year-on-year change. Just using its absolute value, an investor cannot make a judgement about whether its a good or bad EPS. Since it’s a relative measure, it cannot be viewed in isolation and must be judged from different perspectives.
Here are 4 perspectives to judge the EPS for a company:
- Evaluation of the company’s historic data.
- Through comparison against the company’s peers, alongside industry benchmarks.
- By analyzing the market expectations.
- Through the lens of the company’s P/E Ratio.
A growing EPS can be considered good until it conforms to the analyst estimate. If EPS misses the estimate, there is a probability that the stock price could fall.
Ideal method to look at EPS for investors
The best way to look at EPS is in conjunction with the share price through PE ratio. Another way is to check the company’s recent overall performance, competitor performance, as well as analyst predictions alongside the absolute value of EPS.
