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Earnings Per Share: The Magic Formula?

Without knowing about earnings, there’s not much you can do in the stock market. This blog will go a long way in figuring out why everyone is so preoccupied with this. While it’s a must-know, there are also limitations.

Earnings per share is taking note of what a company reports in its results. Investors will always be on the lookout for EPS and from that result will operate accordingly.

EPS critical to assess profitability

Earnings per share (EPS), or after-tax profit, are critical when assessing profitability, and thus a company’s stock price. You can find out a lot more on this topic on www.thestockdork.com and why you need to consider this before investing.

EPS indicates how much a company accrues per share. If there’s a high EPS, this shows the stock obviously has more value. So, if you’re looking to invest in a company within an industry that really has your fancy, the more attractive the value, the more your heightened interest.

The bottom line

When a company reports results, investors are mostly concerned with the EPS and watch what they are with eagle eyes. What are they looking at? Well, the bottom line, which is the profits minus the costs.

Investors and analysts will compare bottom lines with a frenzied eagerness – and with good reason. They will calculate the rising costs of whatever it took to make the product in question and compare it with others. How will raw material costs influence the bottom line? Are some companies procuring it more cheaply than others?

Quarterly results

All public traded companies in the US are required to report their results on a quarterly basis. Before the reports are made public, stock analysts will make earnings estimates. When a company is valued higher than the estimate, its stocks rise. Consequently, if the result is lower than the estimate, the stocks usually fall.

So, earnings and stock prices are inexorably linked. The bottom line is that earnings are a return on shareholders’ investments.

Investors score

The significance of EPS can be illustrated thus – if a company has an earnings bonanza, it can reinvest more in the business or hand out dividend payments to stockholders. Investors score.

When considering the health of a company and EPS, remember though that EPS is not the end or beginning of the resultant performance. Companies can also buy back their own shares, drive the value of EPS and cut the number of shares outstanding without upping net income.

Outstanding debt

So, customers can look as if they’re performing better than they actually are. Further, EPS does not reflect outstanding debt.

You are also unaware of the capital that has been plowed into the company or what is required for further growth. Somebody else may be performing well and using money more wisely.

There have been many instances after results have been announced, where a company has chucked the kitchen sink and everything else at trying to fill a hole in the supply chain, or whatever, and misfired badly. But how were you, as the investor, meant to know this?

Bankruptcy

How did a company that looked as if it was performing brilliantly suddenly file for bankruptcy? There’s one very recent example of a television streaming company that raked in billions in investment. Four months later, it sank like the Titanic. It’s a scary reminder that things may appear too wonderful, but things are not always what they seem.

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