# Earnings Per Share - EPS

Discussion in 'Fundamental Analysis' started by Mohan, Mar 18, 2005.

1. ### MohanMember

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Earnings Per Share - EPS

Earnings Per Share is the Net Income (profit) of a company divided by the number of outstanding shares.

For example if a company earned Rs. 2 million in one year and had 4 million shares of stock outstanding, its EPS would be Rs. 0.50 per share.

Earnings Per Share is the single most popular variable in dictating a share's price. EPS indicates the profitability of a company.

EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while current year and forward year EPS would be estimates.

Earnings per share (EPS) tells an investor how much of the company's profit belongs to each share of stock.
If company ABC reported earnings of Rs.100 million and had 20 million shares outstanding, the basic EPS would be Rs. 5 (Rs. 100 million earnings 20 million shares outstanding = Rs.5 per share). The figure is important because it allows analysts to value the stock based on the price to earnings ratio (or p/e ratio for short).

What are Diluted Earnings Per Share?

Diluted earnings per share (Diluted EPS) takes the basic earnings per share figure one step further. Basic EPS only takes into account the number of shares outstanding at the time. Diluted EPS, on the other hand, estimates how many shares could theoretically exist after all stock options, warrants, preferred stock and / or convertible bonds have been exercised.

The theory goes that because some or all of these investments could be converted or exercised, the number of shares outstanding could increase at any time. This reduces the amount of a company's earnings each share is entitled to. In doing so, the price to earnings ratio becomes higher, and the stock appears more expensive.

In most cases, the diluted earnings-per-share figure is far more accurate estimation of the total earnings per share and receive special attention when valuing a company.

2. ### Tariq AliNew Member

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I have a query here, may sound stupid, but as mentioned in my intro, I am new to the field.

EPS = Net Income / No. of Shares

P/E = Price of Stock / EPS

Now, after rearranging :

Price of Stock = P/E x EPS

What is an ideal P/E and how is it arrived on?

3. ### ivanboeskyActive Member

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What is called the "justified PE" ratio is calculated by the formula
Justified PE = {(Payout ratio)*(1+g)}/(r-g)
Payout ratio is the last dividend per share divided by the last EPS
g is the sustainable growth rate of the company
r is the required rate of return on the stock
This is just a modification of the Gordon Growth formula.
The assumption here is that the company will experience the same growth rate forever, and thus may be useful only in the case of companies in mature industries. The answer you get is also very sensitive to the assumed required rate of return and the growth rate assumed.

4. ### Tariq AliNew Member

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Thanks Ivan.

5. ### hiten1981New Member

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dear ali,
as such there is no ideal PE, the PE multiple stand alone cannot reflect the true picture of the company.U need to compare it with other companies in the industry or with the industry as a whole.then only u will be able to take decision abt the company & its financials.
for more details visit http://www.coolavenues.com
Thnxs
Hitendra Gupta

6. ### altf4New Member

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Just want to add one more point to the above---

Lower P/E (even when compared compared with the Industry or Comparable companies) does not always mean better financial performance. Future earnings expectations plays a vital role in arriving at the price of the stock. If the future picture is gloomy no one will look at that stock even though historical P/E is low.

Just think this way....there are so many fund managers and institutional investors dedicated to the market, who are always in lookout of the cheap bets. So a good company with low P/E ratio can not escape from their eyes.

Hence (I personally) look for those companies whose P/E is close to the Industry's P/E but not to those who are having lowest P/E.

7. ### whyLatelyActive Member

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There is something here that is unclear to me and one is trying to put a finger on it as this is far too fundamental a measure. Here is what is bothering me:

If a company had earning of Rs 2 million p.a. with 4 million shares, EPS is 0.50. If the share market price is Rs 12, the P/E is 24. The price of the share does not seem to enter the calculation.

Another company, in the same industry, whose share price is not the standard Rs 10 but Rs 2, say, and had the same level of performance, would show very different EPS and P/Es.

Would I be right here, or am I missing something? Is there a normalized measure to compare based on a unit Rupee invested?

TIA.

8. ### shivambNew Member

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9. ### AgilentMember

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Yes u r missing something v basic.

Surely u mean par value and not share price (see the red portion)

If you want to compare two cos by their EPS, u need to state them as % and not as Rs per share ... else u will get distortions like u mentioned

Secondly, PE is the answer to yr question ... it is the automatically normalised measure since it contains the 'per share' component both in the numerator and the denominator (unlike EPS which has the absolute profit in the numerator)

AGILENT

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