Earnings Per Share (EPS) refers to the amount of money earned per share, which shows the true profitability of the company, but when interpreting the profitability of the company represented by earnings per share, you also need to pay careful attention to book earnings and actual cash flow, otherwise it is easy to misjudge the company's financial position.。

What is Earnings Per Share?？

Investors can use earnings per share to understand the company's ability to help shareholders make money in a quarter or a year, and to determine whether the company's profitability and sustainability will continue to grow steadily or whether it is a sign of a recession.。

Earnings per share calculation formula

EPS is calculated simply by dividing the company's net profit after tax by the total number of shares in circulation to arrive at a value for earnings per share。

The so-called net profit refers to the company's turnover (Revenue), after deducting the cost of sales, payroll expenses, interest expenses, income taxes and other expenses, the amount of money actually earned by the company.。

The total number of shares outstanding is the number of shares of the company that are outstanding in the open market and includes shares held by the company's management, employees, institutional investors, and retail investors, while treasury stock (Treasury stock) is not included.。

As a result, many investors will care about EPS as well as the company's earnings because it represents the gold content of the stock。The higher the EPS, the more profit each stock can distribute。

The significance of high and low earnings per share

investing in stocks, the company's profitability is naturally the focus。When a company's EPS continues to grow every year, it means that profitability is increasing and it is creating more and more profits for shareholders, which is worth the long-term investment.。However, in focusing on EPS, one should not only focus on the upward growth of EPS, but also compare it with previous years' EPS。

Basic EPS vs Diluted EPS

Unknown to many investors, the original EPS is divided into two types based on the calculation method - basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS).。

Basic EPS (Basic EPS) is calculated in a way that includes only outstanding common stock, while Diluted EPS (Diluted EPS) is calculated to include financial instruments issued by the company that may increase the number of common shares of the company in the future, such as convertible bonds, convertible preferred shares, stock options, etc., resulting in a swelling of equity.。

If these dilutive financial instruments are also included, the resulting diluted earnings per share EPS data will be more accurate and more reflective of the stock's gold content than basic earnings per share.。

Relationship to P / E ratio, dividend payout ratio

EPS to P / E

After the EPS is derived, the P / E Ratio (P / E Ratio) and the Dividend Payout Ratio (Dividend Payout Ratio) can then be calculated.。

The P / E ratio is an indicator used to determine whether the current share price is biased towards expensive or cheap.。Simply put, if you buy a stock at its current share price, is it worth it or not? Also calculate how many years it will take to get back to the original after buying a stock.。

A higher P / E ratio than its peers means that the company may have been overvalued and that there is quite limited room for future price increases; a lower P / E ratio than its peers may reflect that the company is being undervalued and that there is considerable room for future upside.。

Of course, a company with a low P / E ratio may also be gradually eliminated from the market because it has underperformed for many years or is in a sunset industry.。

Earnings per share and dividend payout ratio

The dividend payout ratio is used to calculate how much profit a company distributes to shareholders.。The higher the dividend payout ratio, the more generous the company's dividend payout。

What to pay attention to when using earnings per share to select stocks？

Source of company earnings

Some companies' earnings suddenly skyrocketed because they benefited from the sale of assets.。If the company only uses this to make a profit, its earnings may not be sustainable, after all, the assets will one day be sold out.。So while investors look at earnings, EPS, they also need to understand the source of earnings。

Company Cash Flow

No matter how bright the profit is, it's always just a book number.。If the company's cash flow is negative for many years, the cash on hand will become thinner and thinner, sooner or later into the dilemma of poor liquidity.。Many cases of "landmine units" at home and abroad come from this。So before an investor makes a decision, it's best to check the company's cash flow statement for the last 5 years。

High and low may be due to corporate activities.

Some of the company's corporate activities, such as share buybacks, bonus issues, share splits, and stock consolidation, can result in an increase or decrease in the number of shares outstanding, which in turn affects EPS。

Some industries have cyclical cycles

Automotive, oil and gas, steel, furniture and other industries are typical cyclical industries, so the profitability and EPS of related companies will fluctuate up and down with the economic environment and the rise and fall of external demand.

SUMMARY

While focusing on EPS, be sure to turn over the financial results and check the company's earnings sources and cash flow position in order to more accurately understand whether the company's fundamentals are sound.。Otherwise, it's easy to be brought into the pit by superficial numbers and buy a declining mine stock。

In addition, during the observation of EPS, earnings, cash flow and other data, it is best to extend the observation range to at least 5 years to avoid being confused by the bright performance of a time.。

Importantly, when using EPS to screen companies, it is recommended to compare EPS between peers to get a more reasonable answer。After all, different industries have different boom and bust cycles and profit scales.。