Get to Know Earnings Per Share Ratios

Introduction to Earnings per Share Ratios

Earnings per share ratios (EPS) measure the amount of earnings per share available to common stockholders based on a company’s profits. The calculation indicates how much profit is attributable to each individual share of common stock. In essence, it’s a snapshot of the part of a company’s profits that common stockholders get to take home as dividends.

Investors use this ratio to assess the profitability of investments in a company and compare results of different companies, but information from any single EPS ratio doesn't give investors sufficient details to make a thorough judgement. Revenue, earnings and other ratios should also be considered for a complete picture.

Definition of Earnings per Share Ratios

The EPS figure is found by dividing net income available to common shareholders by the outstanding shares of common stock over a period of time, usually a year. The net income figure is typically taken from the company's income statement, while outstanding shares are available from the company's balance sheet or statement of stockholders' equity.

How it is Used by Investors

EPS numbers can be used to compare companies that operate in the same industry. For example, if two companies have similar EPS figures, but one has a lower sale price, an investor might decide to buy the company with the lower sale price. Comparing EPS gives a quick look at how two companies may compare on profitability.

The EPS figure is also used in price-earnings ratios, which look at how much an investor is willing to pay for each dollar of a company's earnings. Potential investors often look for a low price-to-earnings ratio, as this indicates that the stock is undervalued.

Calculating Earnings per Share Ratios

Calculating Earnings per Share (EPS) is a measure of a company's profitability and helps investors gauge their stability and growth trajectory. A company's EPS ratio can significantly impact their market value and also be used to predict future cash flow.

Gathering Financial Data

EPS Ratios are calculated from financial statement data. This includes data from the balance sheet, income statement, and cash flow statement. Accurate financial data can be derived from both internal and external sources, such as financial reports from the company, stock market research, and analyst reports. It is important to have the most current financial data to get the most accurate calculation of the EPS for any given company.

How to Calculate

The basic formula to calculate a company's EPS is to divide their profit (net income) per share by their number of outstanding shares. Profit per share is calculated by dividing a company's total net income by total number of shares. This calculated ratio can be used to compare different companies to better understand their financial performance.

Importance of Accuracy

EPS calculations should be accurate and consistent across companies to be effective in gauging the economic performance of different businesses. Businesses should report their EPS in the same manner, or restate their EPS, so that investors can effectively compare their profitability. Furthermore, it is important to remember that EPS represents what has already occurred, not future performance.

Ultimately, a company's EPS ratio is a helpful metric to understand a company's financial health, and should be calculated accurately and consistently to provide the most value.

Understanding Different Types of EPS Ratios

Earnings per share (EPS) can be described as a way to measure the financial performance of a company relative to its overall stock price, providing investors with a metric through which to accurately assess a company's value and investment potential.

As with many financial metrics, there are a variety of ratios and measurements that, taken together, can give insight into a company’s performance, its risk versus potential, and its overall health. Here, we will take a closer look at three different EPS measurements, what they tell us about a company, and how they are commonly used together.

Price to Earnings (P/E) Ratio

The price to earnings (P/E) ratio is the core of EPS metrics, calculated by taking a company’s current price per share and dividing it by the annual earnings per share. The result of this calculation is a number that can be compared to other companies in the same sector to get a comparative measure of their liquidity, growth potential, and perceived value.

The P/E ratio can also provide a good indicator of the stock market’s general attitude towards the company, in that a higher P/E ratio may suggest higher investor confidence. A comparison of a company’s P/E to industry peers can also show whether the company’s stock is priced comparatively highly or perhaps undervalued.

Cash Flow to Earnings (CFO/EPS) Ratio

The Cash Flow to Earnings (CFO/EPS) ratio measures how many metrics of positive cash flow a company creates in order to support every dollar of earnings it reports. This is a powerful measure of how sustainable a company’s underlying operations are and how much cash its operations generate.

This ratio is also useful in determining how likely a company is to meet its long-term obligations, as well as how likely it is that it can pay long-term dividends. It takes into account sources such as current and past capital investments, rather than just a traditional bottom line viewpoint.

Price to Book Value (P/BV) Ratio

The Price to Book Value (P/BV) ratio is an important metric for assessing a company’s equity value, calculated by taking the company’s current market price per share, and then dividing that by the company’s book value per share. Book value is the total value of the company’s assets, minus liabilities, and is beneficial in measuring the perceived true equity value of a company.

This measure is important because it can provide insight into a company’s long-term returns potential without taking into account externally generated factors such as market sentiment or analyst ratings.

Industry Considerations

When it comes to exploring earnings per share (EPS) ratios, one of the key considerations is how the ratios vary across industries. Certainly a number of key components are universal, regardless of industry: EPS is always calculated as a company's net income divided by the number of shares, and forward-looking estimates often attempt to project the likely trajectory of the EPS against a particular industry or sector. However, investors should also look carefully at typical EPS trends within any industry for a better understanding of how a company performs in comparison to its peers.

Variations Within Industries

Businesses in any given sector may differ significantly in terms of their respective EPS ratios. Factors such as industry buying cycles, competitive landscape, the concentration of small (or large) players and the overall economic environment impact the EPS of companies within the same industry. In addition, there can be significant variations in the number of outstanding shares—caused by stock splits, reverse splits, dividend payments or share buybacks— that can also affect the EPS of firms in the same industry.

What Ratios to Track

When exploring EPS ratios within an industry, it is important to look at a number of factors. EPS ratios that are useful to examine include the current third-quarter EPS, quarterly operating EPS, 12-month trailing EPS, five-year average EPS, projected EPS and the EPS ratio of the industry. Examining these ratios can give a clearer picture of the company's performance relative to the industry and the market as a whole.

Investors should also look closely at the different types of moves companies in the sector have taken regarding their EPS, such as dividend payments, share splits, mergers and acquisitions, or buybacks. Any of these changes can have a marked impact on the EPS of the respective companies, and understanding these moves can help investors get a better idea of the direction the sector is headed.

Considerations when Evaluating Data

Evaluating the earnings per share (EPS) ratio is an important step in understanding a company’s financial health. This requires considering a few different factors.

Historical vs. Projected Earnings

An important factor to be aware of when comparing EPS ratios is whether the data reflects actual or projected earnings. Historic earnings capture raw performance, whereas projected earnings take into account external macroeconomic factors and potential growth potential. User caution when evaluating EPS ratios, as there is potential to overestimate a company’s true potential.

How the Competition Stacks Up

EPS evaluations should also include research into competitors' ratios. This requires careful analysis to ensure that the underlying data is valid and not influenced by any external variables. For example, if a competing company has had a high EPS ratio for several quarters, but a large part of the figure includes dividend payments, this should be taken into account when comparing results.

When comparing EPS of companies in the same industry, it is useful to proxy each company’s earnings by accounting for identified differences in order to create a fair and accurate comparison. Additionally, assessing the trend of the EPS for each company over recent quarters can provide insight into the longer-term trajectory of the stock or sector.

Summary of Key Takeaways

Earnings Per Share (EPS) ratios are an essential metric for investors to consider when evaluating investments. The analysis of these ratios allows investors to compare the financial performance of one company against the performance of other market players. Understanding the various types of ratios that make up the ensuing financial picture is important — particularly for investors who wish to gain insights at a deeper level. A closer look at EPS ratios can provide a much more detailed image of a company’s dividends and its profits.

There are several categories of ratios to consider when evaluating a company’s performance. These include core EPS ratios like Earnings Per Share, Price to Earnings Ratio, and Earnings Yield, as well as more advanced extensions like Basic Earnings per Share and Weighted Average Diluted EPS. When analyzing these ratios, investors should also look at the wider industry context and the relative performance of other market players.

Finally, it is important to note that while EPS ratios are a valuable indicator of a company’s potential returns, they cannot provide a definitive answer to the overall performance of any given organization. Careful interpretation is needed when analyzing the figures — as well as an understanding of the wider business context — in order to make a sound investment decision.

Conclusion

Investing in the stock market can be daunting, but understanding certain financial metrics can reduce confusion and help guide more informed decisions. Earnings per share (EPS) ratios are a key metric which measure the profitability of a company, and it is therefore essential to understand the concept and how to apply it to different investment decisions. By exploring EPS ratios, investors can gain key insights into their intended investments and anticipate their future performance.

Reiterating the importance of EPS ratios, it is essential to invest in the right stocks and the right opportunities, and exploring a company’s EPS is a great way to do this. Doing so can tell investors how much money a company makes for each share in its stock, which can be compared with other companies, or over a certain period of time. Furthermore, financials such as expenses and debt can all play a part in how investors analyze the EPS of a company. EPS ratios can also be used when considering stock splits, buybacks, and other corporate actions that affect the price of a company’s stocks.

When it comes to the best results, it is important to consider multiple stocks and use multiple analysis techniques. Consider reaching out to a financial advisor for more individualized advice, as they will have access to additional data and resources to help investors make more informed investment decisions. However, by understanding and exploring EPS ratios, investors can gain invaluable insights into the stock they may be looking to purchase, and better understand the company’s overall financial performance.