earnings per share

Earnings Per Share (EPS) is a commonly used financial indicator that measures the profit a company provides per share of common stock during a certain period. Earnings per share help investors and analysts assess a company's profitability, growth potential and market value and compare it with other companies in the same industry or market.

How to calculate earnings per share

The basic formula for earnings per share is:

Among them, Net Income refers to the company's net profit after tax within a certain period (usually a quarter or a year), that is, the remaining amount after revenue minus costs, expenses and taxes.

Preferred Dividends refer to dividends paid by the company to preferred shareholders during the same period. Because preferred shareholders have priority in distributing profits, they are deducted from net profits.

Weighted Average Number of Common Shares refers to the weighted average number of common shares issued by a company during the same period, taking into account factors such as stock splits, mergers, additional issuances, and repurchases that may affect the number of common shares.

For example, assuming that a company's net profit in 2022 is 10 million yuan, the dividend paid to preferred shareholders is 2 million yuan, and the number of ordinary shares outstanding in that year is 10 million, then the company's annual profit in 2022 will be 10 million yuan. Share earnings are:

EPS=10001000−200=0.8

This means that the company provided a profit of 0.8 yuan per ordinary share in 2022.

How to Analyze Earnings Per Share

Earnings per share can be analyzed from many angles. Here are a few common methods:

Comparison with historical data: By comparing a company's earnings per share in different periods (such as quarters or years), you can observe whether its profitability has a trend of growth or decline, as well as the magnitude and speed of the growth or decline. If earnings per share shows a stable or rising trend, it means that the company has the ability to sustain or increase its profit level; if earnings per share shows a fluctuating or declining trend, it means that the company may face pressures or challenges in terms of costs, competition, market demand, etc. .

Comparison to Expectations: By comparing a company's actual reported earnings per share to market expectations or forecasts, you can evaluate whether it met or exceeded investor and analyst expectations for its performance. If actual earnings per share is higher than expected earnings per share, it means that the company's performance is better than market expectations, which may push its stock price up; if actual earnings per share is lower than expected earnings per share, it means that the company's performance is worse than market expectations, which may cause its stock price to rise. Stock prices fell.

Comparison to Same Industry or Market: By comparing a company's earnings per share to other companies of similar size or nature in its industry or market, you can measure its profitability relative to competitors or the industry or market as a whole. If a company's earnings per share is higher than the average or median of its industry or market, it means that the company has a relatively high competitive advantage or efficiency; if a company's earnings per share is lower than its industry or market average, The market average or median indicates that the company may have relatively low competitiveness or efficiency.

Limitations and supplementary measures of earnings per share

Although earnings per share is an important and widely used financial indicator, it also has some limitations and flaws that require investors and analysts to pay attention to and use it in conjunction with other indicators. Here are a few common limitations and supplementary metrics:

Doesn't take into account capital structure: Earnings per share only take into account the profits enjoyed by ordinary shareholders, not how much debt or preferred stock the company used to raise capital. Different capital structures will affect the company's debt level, interest expenses, tax savings and other factors, which will in turn affect its overall profitability and risk level. Therefore, when comparing companies with different capital structures, other indicators need to be used to adjust earnings per share, such as EBITDA or EBIT.

Non-cash items are not considered: Earnings per share only take into account the profits reported by the company in accounting, but do not take into account how many non-cash items it contains, such as depreciation, amortization, inventory changes, etc. These non-cash items can affect how much cash inflows or outflows a company actually generates, which in turn affects metrics like its cash flow statement and free cash flow. Therefore, when analyzing a company's true profitability and growth capabilities, other indicators need to be used to supplement earnings per share, such as cash flow from operating activities (OCF) or free cash flow (FCF) in the cash flow statement.

Excluding share repurchases: The denominator of EPS is the number of common shares outstanding, which may be affected by a company's stock repurchase program. Stock buybacks are when a company uses cash or debt to repurchase some of its own issued shares, thereby reducing the number of outstanding shares. Stock buybacks can increase earnings per share because the same profits are spread over fewer shares, but this does not necessarily represent a substantial improvement in the company's profitability and may simply be a financial maneuver. Therefore, when analyzing earnings per share, you need to pay attention to whether the company has conducted stock repurchases, and use other indicators to adjust earnings per share, such as net profit after tax (Net Income) or net profit margin after tax (Net Profit Margin), etc. .

Disregarding dilution: The denominator of earnings per share is the number of common shares outstanding, which may be affected by new shares or securities such as convertible bonds that the company may issue in the future. These securities are convertible into common stock under certain conditions, thereby increasing the number of shares outstanding. This increase is called the dilution effect because it lowers earnings per share because the same profit is spread over more shares. Therefore, when analyzing earnings per share, you need to consider whether the company has issued or plans to issue these convertible securities, and use other indicators to adjust earnings per share, such as diluted EPS or diluted EPS ratio. EPS Ratio) etc.