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 shows EPS charts for several companies. The EPS chart shows Actual EPS (what the company achieves in a particular quarter), compared to Expected EPS (what analysts expect, derived by averaging multiple analyst estimates). Note: Analysts are people who closely examine a small group of companies to provide investment recommendations to their clients. As a part of their analysis, they also provide financial estimates for the companies.
A company’s share price can be affected by its EPS. Typically, EPS is announced every quarter. When the actual EPS that a company reports is higher than analyst expectations, the share price typically goes up. The opposite is also true, if a company misses its EPS projection, its share price typically falls.
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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Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
This video is meant to be informative and not to be taken as an investment advice and may contain certain “forward-looking statements” which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated”, “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success of or lack of success of particular investments (and may include such words as “crash” or “collapse”.) All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.