What is earnings per share (EPS)? How can it help investors evaluate investment opportunities?
To help you better evaluate stock investments, we added EPS charts to our platform.
What is EPS: Earnings Per Share (EPS) is calculated by dividing net income available for common shareholders by the number of shares outstanding. Since different companies may have different number of outstanding shares, EPS allows investors to compare different companies (usually within the same industry) normalized to a per share basis. Furthermore, a company’s EPS trend that consistently meets or exceeds expectations can also signal the health of the company and the quality of the management.
EPS data has its limitations as well. Companies have the option to buy back their own shares, reducing their number of shares outstanding and therefore increasing the EPS without increasing net income. Further, EPS does not indicate the debt level of the company.
The image shown above displays EPS charts for several companies. The EPS chart compares Actual EPS (what the company achieves in a particular quarter) with Expected EPS (what analysts anticipate, based on the average of multiple analyst estimates). Analysts closely examine a group of companies to provide investment recommendations to their clients. As part of their analysis, they also provide financial estimates for these companies.
A company’s share price can be affected by its EPS, which is typically announced every quarter. When a company’s actual EPS exceeds analyst expectations, its share price often rises. Conversely, when a company misses its EPS projections, its share price may fall. EPS also plays a key role in calculating the price-to-earnings ratio, a widely used valuation metric that helps investors assess how much they are paying for each unit of a company’s earnings.
From the image above, you can see that Amazon crushed its Q1 earnings. As a result, the share price went up after the earnings announcement. In contrast, Boeing, after beating its Q4 2018 earnings expectations, came short in Q1 2019, due to the issues the company is experiencing with its 737 MAX planes. Meanwhile, Microsoft continues to be a strong performer, beating its expected EPS in the last four quarters.
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