Investor Ratios measure how attractive public limited companies are for current and future shareholders to purchase. EPS (Earnings Per Share) is one of them.
Buying shares in a company has the potential for two kinds of financial return. Capital gains can be made when the share price is rising – you buy when cheap and sell when expensive. In addition, companies pay annual dividends to shareholders – you get a part of the firm’s profit (unless profits are too low or losses are made).
Investor Ratios give an indication of the prospects for financial gain from both of these sources.
What does EPS (Earnings Per Share) measure?
EPS (Earnings Per Share) is ratio between Net Profit After Interest and TAX, and Number of Common Shares Outstanding. It compares Net Profit After Interest and TAX with Number of Common Shares Outstanding.
EPS (Earnings Per Share) measures how much earnings after TAX a company makes for each one share of its stock.
EPS (Earnings Per Share) measures how much earnings after TAX a company makes for one share of its stock.
How to calculate EPS (Earnings Per Share)?
The figures for working out EPS (Earnings Per Share) can be found in Profit and Loss Account (P&L Account), The EDGAR System, the primary system for companies to file documents for The SEC (The U.S. Securities and Exchange Commission), Yahoo Finance, or any reliable stock broker:
| Net Profit After Interest and TAX | |||
| EPS (Earnings Per Share) = | ━━━━━━━━━━━━━━━━━━━━ | ||
| Number of Shares Outstanding |
Example for EPS (Earnings Per Share)
A company with 1,000,0000 Shares Outstanding that has Net Profit After Interest and TAX of USD$4,000,000 earns USD$4 per one share. EPS (Earnings per Share) of USD$4 implies that the company earned USD$4 for shareholders for each one share they own.
Comment
EPS (Earnings per Share) is expressed as a number in currency.
EPS (Earnings Per Share) is a widely used metric to determine corporate value. Investors will be willing to pay higher price in the future for shares in companies with a higher EPS (Earnings Per Share) because the company has generated higher Net Profit After Interest and TAX relative to Number of Shares Outstanding.
High EPS (Earnings Per Share) means that the company has higher net earnings relative to its Shares Outstanding. A higher EPS (Earnings Per Share) indicates greater value because investors will pay more for the company’s shares. High EPS (Earnings Per Share) means more benefits for shareholders – more potential current dividends and more potential future reinvestments in the company.
Low EPS (Earnings Per Share) means that the company has lower net earnings relative to its Shares Outstanding. A lower EPS (Earnings Per Share) indicates lesser value because investors will pay less for a company’s shares. Low EPS (Earnings Per Share) means less benefits for shareholders – less potential current dividends and less potential future reinvestments in the company.
How to improve EPS (Earnings Per Share)?
Improved EPS (Earnings Per Share) means higher EPS (Earnings Per Share). The company will now have more earnings after TAX for each one share of its stock that shareholders own.
- Higher Net Profit After Interest and TAX. The company should increase Sales Revenue as well as decrease the cost of production Cost of Goods Sold (COGS), decrease Expenses (Overheads), decrease Interest payments on debt and decrease TAX obligations to the government. Increasing Net Profit After Interest and TAX will increase EPS (Earnings Per Share).
- Less Shares Outstanding. The company, especially companies rich in cash, should buy back its own shares from the owners. Decreasing the Number of Shares Outstanding will increase EPS (Earnings Per Share) as more Net Profit After Interest and TAX will be now allocated to each common share.
Investor Ratios are of particular interest to current shareholders and prospective investors who need to assess the rate of financial return on shares and risk when making an investment to buy the shares.
