Earning Per Share (EPS) is indicate a business profitability divided by number of outstanding shares of a common stock.
Commonly reported as adjusted for extraordinary items and potential share dilution.
When viewing EPS, comparing with competitors of similar nature within the same industry would be a valuable benchmark against what’s the business actual worth across a period of time.
With the current state of technology, EPS ratios with trailing 12 month period is widely available with a click of a button (don't you just love technology [Sly]).
EPS Formula
EPS peg against PE
Price to earning ratios (PE), as the name suggest the company’s stock price divided by earnings per share. Its an indicator of how much the market willing to pay for each dollar of earnings generated by the company.
As always, investors tends to be forward looking in any investment decision, the indicator of EPS and PE is no except.
Basic Vs Diluted EPS
Basic EPS does not take into consideration the full effect of future dilutive effect of shares. Such dilutive is the result of capital structure changes such as stock options, warrants or restricted stock units.
Example:
$Palantir Technologies Inc.(PLTR)$ have been retaining its talent pool via stock base compensation. The more stock compensation allotted, the more diluted would be the value worth of stock.
Even though $Palantir Technologies Inc.(PLTR)$ ’s revenue have grown 82%, the overall impact is in the negative territory when comparing revenue per share in 12 month trailing terms.
If we look back to EPS
3/2022 Earnings before Extraordinary items -101.38, outstanding shares 2,045.88
3/2021 Earnings before Extraordinary items -123.47, outstanding shares 1,860.61
Base on the above information from Investing.com
EPS 3/2022 is -0.04955 Vs EPS 3/2021 of -0.06636. However if we assume that Earnings before Extraordinary items remains the same as of 3/2021, you will notice the diluted EPS of -0.06035 (-123.47/2,045.88)
https://in.investing.com/equities/palantir-technologies-inc-income-statement
Exclusion of Extraordinary Items
EPS calculation needs to exclude extraordinary items.
Reason? It tends to distort the calculation. Imagine that there is one off transaction that happened in the business where the company manage to sell one of its business division for substantial gain. Such gains would distort the EPS comparison its business performance year-on-year basis.
Business Continuation
If a business performance is better off by cutting down its outlets from say 50 to 30 outlets, such decision would most certainly shown in its earnings, in order to measure its real business performance terms, comparison should be made for existing 30 outlets Vs previous period of these 30 outlets for indication of growth and sustainability.
EPS Limitation
In calculating EPS, there is generally two components that dictate its outcome, net income and number of outstanding stocks. Such possible ‘manipulation’ might occur when the number of available stocks are reduced via way of stock buyback.
Though this would be give signal that the company's commitment towards its future growth and its sustainability. From Investors' perspective, less is better.
What’s your take on EPS?
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