Earnings per share is an important trading formula for a number of reasons. It denotes the amount of a company’s yearly profit that is dedicated to each share that they have outstanding.
Throughout this article, we will explore the reasons as to why the earnings per share ratio (EPS Formula) is an important trading formula, and why it is well respected and used by many investors.
Why is earnings per share an important trading formula? Earnings per share can help to measure how profitable or not a company is. It is a very important measure in all aspects of financial analysis, and forms a very important part of many potential investor’s decisions. The earnings per share ratio is the only one that is able to find out what shareholders could get back by investing in a company.
If a company has an earnings per share value that has grown considerably and at a normal rate, then it tends to be a positive sign that the company has been and has continued to be in a good financial position, and that it is making correct business decisions. Of course, the normal purpose of a company being in business is to maximise their profit so that they can reinvest their profits in further expansion.
From the point of view of an investor, an expanding earnings per share value is good not only because it displays that the company has been doing well and expanding at a normal rate, but it also shows that the company has been paying back out to those who have previously invested in it. On the other hand, should a company have a negative earnings per share ratio value, this could point to problems such as lack of profiting, financial turmoil, losing money more than making it, and not paying anything back to those that have invested. The key information that earnings per share provides potential shareholders with and why it is important to them, is that it tells them how much they could reasonably expect to get back on their investment, and also how much profit the company makes.
Earnings per share can help potential investors to see how likely them getting a pay-out at the end of the year is (a return on their investment). An investor will only obtain a dividend assuming the company in question has enough profits to pay them out. A dividend of a company is a share of their profit, it is the main incentive to make any investment in any company – it is the return that the investor gets on their initial into the organisation. Different investors will be interested in obtaining different types of return on their investment, and will initially invest for these different reasons.
For example, some investors may want to see a fast and large return on their investment, others may want to see a large return but are more willing to wait for it, and then again others may want to see a smaller but more consistent return on their investment. Dividends tend to be like the more steady returns that dividends can provide. Finding out whether a not a company has given out dividends recently can also be a great way to try and establish how well they are doing financially-speaking.
For example, a company would not pay their shareholders dividends if they did not have the sufficient funds – they would pay dividends and can only give said dividends if they were in a position in which they had extra earnings per share of the company. The paying out of dividends is not correlated directly with earnings per share in any way in particular, but, a company that has been seen to be paying out dividends to its shareholders is seen as one that will also most likely have either a steady and reliable EPS, or one that is growing.
The paying out of dividends from a company to its shareholders is of course dependant on a number of factors within the company at the time, but if you are considering investing in a company with the hope of a steady return/payout of dividends, you should be sure to analyse and trends in the earnings per share ratio of the company before you decide to do so.
Taking a look at earnings per share can also be important if you are considering investing your money, but are unsure with which company to invest and you are comparing a few different one. It can give you as the investor, information on how good an investment you might potentially be making based on how durable the future of the company in question might be or looks. If you are at the point at which you are comparing two company’s and one has a higher earnings per share value than another, the one with this higher EPS value could quite possibly be the wiser decision to make with your financial future in mind – this is the case since those organisations that have a higher EPS value often, it usually means that they are the one of the two or more that make more profits than the others, they tend to have more funds available.
Examining the EPS of a company can also help you gauge whether or not the company have performed normal and have expanded at a normal rate – this can be done by looking for any major fluctuations in the score over certain periods of time. If a company displays steady increase in the value of their earnings per share and no sudden jumps are apparent, then it is a good pointer that the company could make for a sensible investment. Often, this can be the deciding factor for an investor when looking at two different companies.
There are different types of earnings per share value as well, these include trailing EPS which looks at the EPS score of the organisation in the past, as well as current and forward EPS which examines the current value of the company based on their current and expected positions in the close future.