Earnings per share represent the profits or dividends each outstanding share earned in a quarter or in a 1 year. The EPS helps investors to determine the profitability of a company.
How to calculate EPS?
You calculate the EPS by dividing the net profits by the total number of available outstanding shares.
EPS = (Net profit)/(Number of outstanding shares of common stock).
The solution from the above equation will determine whether a company is profitable or not. You don’t necessarily have to calculate these values yourself because they are available online for publicly traded corporations.
Before investors put their money in a company, they do fundamental analysis. That is they analyze all financial reports. This analysis helps them understand where the company stands in terms of profitability.
Furthermore, they analyze their financial ratios to help them understand where the company stands compared to the industry and its competitors.
The EPS also helps investors to compare alternative investments, evaluate the company’s historical performance, and future growth. Source: Zacks.com
If you are an investor already, the EPS will help you understand how much it made or lost for you.
Positive EPS
If the EPS is positive, it means that the company generated more revenues for its shareholders. Source:budgeting.thenest.com. The company may decide to not give you dividends. However, you will still profit since these earnings will be reinvested into the company for expansion.
What is the EPS is negative?
A negative EPS will imply that the company is losing more on its operations. This is problematic for many investors. If a company is losing money with no green light in the future, it may be a sign for you to abandon your investments and put your money elsewhere.
Depending on the nature of your investments, you may not worry about a negative EPS. Some companies spend a ton of money on product development and make it back once the product is on the market. This will be the time you will start gaining.
