How to Analyze EPS

EPS Analysis is the base of investment in company's stock. EPS means earning per share. When we divide our net income with our total number of shares, we can calculate the EPS. Following is the formula of EPS

Any shareholder can take 3 types of investment decision. 

1. He can purchase the new shares of same company.
2. He can purchase the new shares of any other company. 
3. He can sell his bought shares. 

There is direct relationship between shareholder's decision and EPS. Any of these 3 decisions will taken on the basis of EPS analysis. Higher EPS will increase the share value. So, market value of share will increase due to increasing the EPS. Some company can sell the share because they will get good profit on selling of these stock. Other company will buy because, they will get higher dividend because EPS is very high.

For analysis the EPS, we will following two Steps :

1. Analyze the EPS of Two Period 

Two periods' EPS will tell us whether EPS of same company will increase or decrease. We take the example of Google Inc. Its EPS in the first quarter of 2012 was $ 8.75 and first quarter of 2013 was $ 9.94. So, earning per share has increased by $ 1.19. For this analysis, we can evaluate that company's performance is better in first quarter of 2013. If any company is not providing EPS information, you can calculate this information by using the financial statement's figures. 

2. Analyze the EPS of Two Companies

For example, we compare Google Inc. and Yahoo Inc. We take both's EPS. from Google Finance Report in which we find that EPS of Google Inc. is more than Yahoo Inc. 

3. Study Price Earning Ratio 

If we divide Market Value of Shares with EPS, we can find Price Earning Ratio. If market value of share is $ 1000 and Earning per share is $ 950, then P/E Ratio will be 1.05. It means, company has enough earning to repay one share's market value within 1 year (approximate). So, this EPS is good for company and its shareholders. 


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Accounting Education: How to Analyze EPS
How to Analyze EPS
Accounting Education
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