When it comes to stock fundamental, the first thing in mind is to look at the macro-perspective of the economy (macro-economy) before you even start looking into each individual stock. 2 things are important to understand this macro-economy are by looking at these 2 important key indicators as I mentioned in my previous post:
What is Earning Per Share (EPS)?
The formula is:
The EPS can be get from the “Income Statement” of a company which is usually reported in the company’s annual report. You can go to the company website and look for the “Investor Relations”. It usually puts under the “About Corporate”. The EPS is usually stated in the “Income Statement” and you do not need to calculate at your own. If it is not stated, then you can have to calculate the EPS using the formula above which is unlikely the case I think. :)
What does EPS mean to investor?
It basically tells you how much you earn or your ROI per 1 share that you invest. So, the higher the EPS the better. This is also called “Dividends” but investor usually do not get all the value as stated in the EPS. It is up to the company to declare how much dividends they want to give and use the remaining profits for their business.
When doing fundamental analysis using financial ratio, one of the key things to compare the companies with the same industry. You usually do not compare 2 independent stocks that from different industry. The following is an example that I get for MAS and AirAsia Airlines in Malaysia for annual analysis comparison.
Table 1: EPS (MAS vs AirAsia)
|MAS (EPS)||58 sen||14.6 sen||25.3 sen||7.2 sen|
|AirAsia (EPS)||21.2 sen||(21.1) sen||20.6 sen||38.4 sen|
So, which one is better? If you take the average, it is probably about the same for MAS and Airasia stocks but you can see the trend for MAS is moving down. Thus there is another better indicator is called" “EPS Growth Rate”. This is not stated in the income statement of the annual report. You have to calculate your own. For example, this is the EPS growth rate for MAS and Airasia for the past 3 years based on the table 1 above:
Table 2: EPS Growth Rate (MAS vs AirAsia)
So, which one is better? Probably Airasia? You can also see that it recovered with +~200% EPS growth rate in 2009. Same to MAS but it dropped again with minus ~70% in 2010. Thus, AirAsia is better? :D Not true? You can try to confirm the data in 2011. :) Past 3 years may not sufficient, when you look beyond past 3 years, MAS was in fact having low or negative EPS. Anyway, if you are really a serious investor, you should also look closely at the quarterly report. It may gives you any signs of weakening profit.
EPS may not tell the consistency performance but the EPS growth rate will. If a company always has positive EPS growth rate in the past few years, it means the company is fundamental strong - a least is not losing money and growing. Also, don’t forget that when you perform the analysis, you should always compare companies within a same industry. Then, you will have some ideas who is performing better.
P/S: Are you the one lazy to read annual or quarterly financial report because the content is so damn long? This is because you do not know what information that is really useful to you. So now, you at least know “Earning Per Share” – just do a search in the annual report and you do not need to read all the content. Also, if you really interested in a particular company, just use a simple excel spreadsheet to keep track of their current and past performance. :)