Calculating earnings per share will significantly help you to compare stocks of two different publicly-held companies. Since it is hard for investors to get apple to apple comparison, then merely comparing two companies will not help. Thus, earnings per share (EPS) can help them making more meaningful comparisons before you make investment decisions.
Comparison of Stock Prices
Many experienced investors know that a simple comparison between two stock prices mean nothing. Similar to that, a simple comparison between the two companies’ earnings also does not make sense. Using raw numbers only means the investors ignore that those two companies, at least, undoubtedly have a different total number of shares.
Therefore, EPS is a better comparison tool for investors. The example below will make you understand this concept easier.
There are two companies, A company and B company, that have the same $100 net income. Yet, they both have a different number of shares. Company A has 10 shares of stock outstanding, meanwhile, company B has 40 shares outstanding.
In that example, company A has higher EPS, thus, having its stocks will bring the investors more cash than having the company’s B stocks. Especially, if those companies also pay dividends. The total dividend payments given by the company will only spread over 10 shareholders instead of 40.
Calculating Earnings per Shares
To calculate the earnings per shares of a company you need to use this formula.
EPS: net earnings / outstanding shares
If we use the example above, with earnings of $100 and 10 outstanding shares, then company A has an EPS of 10. On the other hand, with earnings of $100 and 50 outstanding shares, company B has an EPS of 2.
Therefore, buying company A shares of stocks is more beneficial for investors. Yet, an investor cannot rely on the EPS calculation only when they about to buy the shares of stocks.
EPS only help compare two companies with the assumption that they are in the same industry. Yet, it does not consider if it is a good stock and the condition of the market. Thus, investors also need to examine the company’s market view, financial ratio, and others.
Types of Earnings per Shares Numbers
Knowing the EPS types can help investors to better compare stocks. Here are the types of EPS.
- Forward EPS: it is the projection of the future EPS numbers
- Current EPS: it is the projection of this year EPS numbers
- Trailing EPS: The only actual EPS numbers since it comes from last year numbers