Why is earning per share ( EPS )?

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Earnings per share is the most widely used term in the stock market. After investing in the stock market or becoming an investor, at least the per share income (EPS) of the company concerned should be taken into consideration. It is not enough for investors to know only earnings per share in the market. There are many other indicators to consider. But this earnings per share is one of the most important indicators that everyone should know.

The professional investors of the stock market are initially motivated to look at the earnings per share of the company concerned and then gradually look at other indicators of the financial statements. In other words, when you start studying this financial statement, it may not be different from ‘A’ in A, B and C. Earnings per share informs the investor about the earnings per share of any company.

Investors can also use this ratio to find out how well the company is performing compared to its competitors and the industry as a whole. In addition, earnings per share play an important role in determining other financial indicators of a company.

So what is earnings per share?

In the general sense, earnings per share is the earnings per ordinary share of the company. The higher the earnings per share, the stronger the financial position of the company concerned, the higher its value and the higher the dividend payable to the investor. Listed companies usually make their earnings per share public through financial statements at the end of each quarter.

The company’s earnings per share is one of the most important financial ratio investors need to know. However, when investing financially in any company, you should not invest only by analyzing EPS. The changes in the company’s EPS over time should also be taken into account. It is also important to compare EPS between similar companies in the same industry.

Why is EPS important?

EPS analysis is important when deciding whether to sell, buy or hold shares of any company. EPS can be used for various purposes.

1. EPS works to determine a company’s profitability. The ability to make a profit also affects the company’s dividend potential and share price.

2. To know the price-to-earnings ratio (PE ratio) of a company. The PE ratio determines whether the share price is high or low based on the company’s earnings.

3. Find out if the company’s profits are increasing or decreasing over time.

4. To compare the company’s actual earnings per share and analysts’ estimates.

5. To compare whether the company has paid dividends to investors in the range of earnings per share.

However, the earnings per share of companies in different sectors vary. Therefore, there is no single number that represents good earnings per share. Good earnings per share depend on the company’s current position and the company’s future performance.

How to calculate earnings per share? (Basic and diluted EPS)

Although the method of calculating earnings per share is simple, it can be different. Different results can come from different methods. Companies generally disclose two types of financial statements, Basic EPS and Diluted EPS. Investors also use this as a basis. A common method of calculating earnings per share is to divide the company’s net profit by the total number of ordinary shares. Which is called the company’s ‘Basic EPS’.

Similarly, the method of calculating diluted EPS is somewhat different. Basic EPS takes into account only the total ordinary shares of the company, while calculating diluted EPS includes ordinary shares, stock options, preferred shares and convertible securities. Due to which diluted EPS is less likely to appear than basic EPS. The diluted EPS also makes it easy to find out the actual details of the dividend that the investor can get or the company can distribute.

These things cannot be known from earnings per share

Knowing the company’s earnings per share is very beneficial for investors. However, EPS is only a part of the overall financial analysis. EPS alone cannot provide all the information. On the one hand, it has nothing to do with the existing share price of the company. Therefore, even if the company is performing well, the share price can be very expensive and the company may be overvalued.

Earnings per share are calculated based on the company’s overall profit. Therefore, both Basic and Diluted EPS cannot provide information about the extraordinary revenue or expenditure side of the company. For example, a company made EPS high by making huge profits from one-time trading in a quarter. However, the company cannot maintain high EPS unless it can repeat the same kind of business.

Therefore, the reason for the high profit does not come from EPS. Analyzing the company’s EPS trends also requires more research to find out why EPS is rising or falling. Along with EPS, analysis of other financial ratios is also important

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