In CNBC or ET Now every day you listen to a term called EPS. Now, what is EPS? The full form of EPS is Earnings Per Share. But what is the earnings per share importance for stock market investors? Why is the term EPS so important for someone going to invest in a stock for the long-term?
Earnings Per Share is the net earnings of the company divided by the number of shares of the company. So its a per share version of the performance of the company in terms of its profits. So another word for Earnings Per Share can be Profits Per Share. The main question the investor wants to know before investing in any company is “whats your profit?”
The main problem in Earnings Per Share is it is calculated using a specific system. The calculation is such like that you show you get to pay even if you don’t get pay, and as if you have paid all of your expenses even if you pay them later. There is a really good reason why the accounting system for calculation is such. Because there are instances where companies are having pretty good Earnings Per Share, still they got broken. The reason for the failure of such companies is they did not actually have cash.
So we will look for a company with good EPS while the cash flow is also of utmost importance. We use EPS to calculate two important values of the growth of the business.
1) The growth of EPS over a period of 10 years
2) The margin of safety analysis. It’s like if I pay Rs. X as EPS, how many days or years will it take to get my money back from the profits of the company. This is also called the payback time analysis.
These are two utmost reasons for Earnings Per Share importance for the investors. So EPS along with the cash flow is most important to understand the value of the business.