Investors usually look out for a steady source of income. The source of income for any investor usually comes in the form of return from the invested capital. One of the financial tools to provide such return is Earnings per share (EPS).
What is EPS?
EPS refers to market prospect ratio where the proportion of company’s profit is allocated to each outstanding share of common stock. It is one of the important metrics of financial measure that provides understanding of profitability of the company to the investors.
How can we calculate EPS?
Calculation of EPS can be calculated as:
Earnings per share =
(Net Income after Tax - Preferred Dividends) divided by Total Number of Outstanding Shares
Preferred dividend is deducted from Net income after tax because EPS measures the earning available only to common shareholders.
Why is EPS important in investing?
- EPS gives an insight of overall profitability of the company.
- It represents the “E” in P/E ratio; thus, helps in calculating the P/E ratio.
- Higher EPS often causes the stock price to rise.
Is a higher EPS better than a lower EPS?
When a company has a higher EPS, it provides two meanings 1) Either, the company has more funds available to reinvest, 2) Or, the company will distribute the available funds to stockholders in the form of dividend. In either of the case, investor seems to be in the win-win situation.
Application of EPS in Nepali market:
The data from each of the sample sectors in Nepal has been taken and the calculation of EPS and annualized EPS has been shown in the table. However, the EPS of these institutes cannot be generalized as the EPS of the whole industry.
Are there any limitations of EPS?
- EPS alone cannot provide the snapshot of the whole investment decision. Investors must also consider other ratios such as P/E ratio.
- EPS can be distorted at times because companies can easily manipulate their net profit.
However, investors can rely on EPS considering all other factors and ratios.
