Thursday, February 18, 2016

EPS - Earnings Per Share

Yes, EPS means Earnings Per Share but what does it really mean? EPS is the portion of the profit of a company that is assigned to the share of the company that you are looking into. Basically, it's another good indicator of whether or not the company you're interested in is profitable.

If you've never calculated it before or if you even care to try to calculate it on your own, it's calculated by dividing the net income minus the dividends of the stock by the average outstanding shares. It's very simple but if you're a seasoned investor or if you ever even peered at a breakdown of any stock on Yahoo or Google Finance, you know that it's already listed out for you. It's like being back in high school math class when the professor tells you to learn how something is calculated; you won't need to ever know how because the math is already done for you when you're an adult and have access to these things but you should still know how it's calculated just in case you ever need to add it up yourself.

It's arguable whether or not EPS is necessary when looking at a stock because so many factors can affect how the number is obtained. Some companies with less equity are able to more easily obtain a better EPS than another simply because they have less equity. It's not that it's unfair, it's just that it may take less for one company than another if one simple variable is changed. Therefore, one should look at the company at hand and take in their EPS but should always remember that it is not an all seeing eye.

With that being said, investors all too often place a high value on a company's EPS and this can sway the prices in your favor or against you. This is the reason that I like to make sure to keep it in the back of my mind when I'm evaluating a company. I don't use it as a main item on my review of a company because I personally don't think it measures a company but I do like to always check it to see how it may affect the price as other investors rely heavily on it.

In wrap up, the EPS is important to note as it is a key to determining whether the price of a stock is fair or not but it should be on the side line rather than on the forefront when evaluating a company. At the end of the day, the sheets of a company are much more important than the EPS ever should or could be.

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