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CAPITAL MARKET

EPS (Earnings Per Share)

The EPS which indicates the overall profitability of a company listed on the stock exchange. Ideally you would like to see a company deliver results, because this leads to the stock’s price rising. Therefore, when examining the earnings of a company you need to look over the last three to five years of earnings to identify whether the forecasted growth is in line or above the average growth for that period. If the EPS is consistently increasing, this suggests that the company is being well managed but you should also look at the projected EPS. This is so that you can see whether the growth and therefore the growth of the share price, is expected to continue into the future.

Often you will find the EPS forecast expressed as:

1. Previous year(s): what the EPS was in the past year(s)

2. Current: what the EPS is this year

3. 1 year: what analysts estimate it will be in one year

4. 2 year: what analysts estimate it will be in two years

The figures used in supporting your analysis are dependent on the intended time frame upon which you would like to trade. E.g. if you are trading short term; the current EPS compared to last years, combined with the outlook for the next year is more relevant to you.

If, however you are trading over the medium to long term, then the two year forecast compared to the current year is much more important.

Keep in mind that a forecast is not a guarantee, and these figures can change.

Therefore it is important you always trade on what you know (and can verify) at the time.

The EPS is calculated by dividing the net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

For example ABC Corp. reported net income available to shareholders of $5 million.

Over the same time frame, the company had a total of 8 million shares outstanding.

The company’s quarterly earnings per share (or EPS) would amount to $0.40, calculated as follows:

$5 million in earnings divided by 8 million shares = EPS of $0.62

Analysing the current EPS and then comparing it to the forecasted growth will not always mean that the share price will grow by this amount. And just because one company has a higher earnings growth over set period over another doesn’t mean that their growth will be better.

This is why you should always consider all the data available on a company prior to making a decision on whether to purchase shares or not.

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