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Saturday, December 13, 2014

Weekly Investment Term #7



Today, we gonna go back to basics and talk about one of the most fundamental analysis that we look at in investment of a stock...

EARNINGS PER SHARE (EPS)

This is in fact one of the most carefully followed metrics in investing.



Earnings per share generally means the portion of the company's profit that is allocated to each outstanding share of common stock.

It is what investors look at to gauge the profitability of a company.

EPS = net income - dividend to preferred shareholders
                         average outstanding shares


In practice, the weighted average number of shares is more accurate because the number of shares outstanding can change over time. 

There is also the diluted EPS which takes into consideration of the shares of convertibles or warrants outstanding in the outstanding shares number.

Here is an important note to EPS that we feel readers/investors should look into when talking about EPS.

  • Two companies could generate the same EPS number, but one could do so with less equity, thus the company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company in theory. 
  • Investors need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.



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