Did one share really earn that much!? How does EPS affect stock prices?

Every earnings season, major listed companies release their earnings reports one after another, with a multitude of data and indicators.

For investors, there is a very critical data point, which is earnings per share (EPS).

Earnings per share, abbreviated as EPS, is an indicator of a company's profitability per common share.

Simply put, it is how much money a company earns per share.

In financial reports, earnings per share is usually expressed in two ways, namely basic earnings per share and diluted earnings per share.

Basic earnings per share is derived by dividing the company's net profit by the number of common shares outstanding.

For example, if company A has a net profit of 10 million dollars in a year, and there are 5 million shares outstanding, the EPS is $2 per share.

It is worth noting that if a company issues preferred shares, then the dividends paid to preferred shares must be deducted from the net profit before dividing by the number of outstanding common shares.

Returning to the previous example, if the company pays preferred stock dividends of 1 million US dollars annually, then the EPS formula is 10 million minus 1 million, then divided by 5 million shares, the EPS is $1.8 per share.

Unlike basic earnings per share, diluted earnings per share are adjusted when calculating the outstanding shares.

The calculation method for diluted earnings per share is to divide the net profit by the ordinary shares currently outstanding plus the potential ordinary shares that could be outstanding in the future.

The potential outstanding shares here can be preferred stock, convertible bonds, and stock options, etc.

Therefore, diluted EPS generally tends to be lower than basic EPS.

For investors, tracking a company's EPS is important.

Because in the long run, EPS is an important factor in determining a company's stock price.

A steadily increasing EPS may boost the company's stock price.

On the contrary, a continuous decline in EPS may also lead to a decrease in the company's value.

However, in the short term, the company's stock price may not necessarily rise with an increase in EPS, and vice versa.

Analysts' forecasts are equally important.

Analysts' forecasts refer to analysts, investment banks, or financial institutions' predictions of a company's EPS.

When a company's reported EPS exceeds analysts' expectations, it is considered "outperforming expectations," which may drive the stock price up.

If a company's reported EPS is lower than analysts' expectations, it is considered "below expectations," and the stock price may decline.

Investors all hope that the EPS of the companies they invest in can continue to grow steadily.

But remember, an increase in EPS does not always necessarily mean that the company is performing well.

Companies can generally increase EPS through two methods: increasing net profit and reducing outstanding shares.

If the outstanding shares remain stable, a company can increase EPS by increasing net profit.

This is a good sign because it indicates that the company is earning more money.

However, if a company's profits include one-time income, investors should be cautious as this is non-recurring income.

Companies can also increase EPS by reducing outstanding shares.

For example, in recent years, more and more companies have been using cash to buy back their own stocks.

Through this method, companies reduce outstanding shares, increasing the EPS value even when the company's profit does not grow.

In summary, earnings per share is a common indicator used to measure a company's profitability.

Eps is one of the most focused by investors because it has a significant impact on the company's stock price.

This is the end of a series of videos interpreting earnings reports, see you next time.