What is EPS? | How to analyse it? | Earnings per Share
EPS or Earnings Per Share is the share of profit distributed to the shareholders on each share.
Shareholders are the company’s part owners and they have the right on company’s profit but company does not share its whole profit with the shareholders because most of the companies believe in reinvesting their profit in the company so that they can expand their business.
Earnings per Share means if company shares its profit with its shareholders, so how much amount is earned by every shareholder on each share.
EPS = Profit / Total no. of outstanding shares
The net profit of the company can be drawn from the profit and loss statement of the company. Net profit is also known as Profit after Tax.
To calculate the number of outstanding shares, you need to divide the company’s Market capitalisation by the current share price.
It is always better to take the company’s market capitalisation and the share price after the market gets closed.
If you want to find the more accurate EPS, then deduct the preference dividend from the earnings of the company while calculating the EPS.
EPS = (Earnings – Preference Dividend) / Total no. of outstanding shares
These days EPS of any company is easily available and you don’t need to calculate it. All you need to do is to analyse the EPS.
Whenever you search any share on money control, you get the EPS of 12 months. But that is not enough, you need to evaluate the EPS of at least 5 years to get a better picture.
The higher the EPS, the better it is. If the EPS of the company is increasing since last few years, then it is nice gesture.
When you do the fundamental analysis, then just to check 2-3 ratios is not enough.
You should not purchase the shares of any company only because its EPS is good and its increasing. EPS is just a small part of the fundamental analysis.