Sunday, October 30, 2011

Using Earning Per Share (EPS) to Analyse Stock

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:

The next thing what you want to do is to study each individual stock that you plan to invest using “Financial Ratios”. There are many financial ratios out there, the most basic one is called “Earning Per Share” or EPS.

What is Earning Per Share (EPS)?

 The formula is:

EPS = Net Income / Average Outstanding Shares 
Note: Net income is sometimes called “Net Profit” as well. Average outstanding share is sometimes called ”Weighted average number of ordinary shares in issue”.

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)
Malaysia Airlines 2007 2008 2009 2010
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)
Malaysia Airlines 2008 2009 2010
MAS -74.8% +73.3% -71.5%
AirAsia -200% +198% +86%

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. :)


Unknown said...

Yes, EPS is the single most important piece of information any serious investor must know about the company they invested in.

However, EPS alone can't tell you whether to buy, to hold or to sell.

Happy investing in share market.

kampunginvestor said...

One of my favorite tools when i buy a stock! ^^ With the EPS we can get to know the PE of the stock!

That is how simply i make my stock picks and it is working most of the time! ^^

Just my 2 cents! ;)

ChampDog said...

@Chong, I think whether to buy, hold or to sell, it is up to the individual investment judgment unless you talk about the technical analysis. :) Good thing about EPS is it tell you the financial fundamental of a company. Happy ivesting to you too! :)

@kampuinginvestor, the fundamental guy! That's why you like this.:) Yupe, later the EPS is used to calculate the PE ratio which is another indicator that we can look at.

Alvin Lim said...

EPS is also the thing i look at normally. but i din really compare with the rest of the industry =_= kinda lost when i trying to compare :P

another one is shareholders equity which is like a acc for the company? ideally, it should increase healthily over time

ChampDog said...

Why lost? LoL There are many indicators to look for. Some may not give you any clue but the more that you look at, you may have some ideas who is performing better. Anyway, I"m still learning. :) I will do more sharing on other stuff (e.g. PE ratio and etc.)

Do you mean the total cash of a company? That means the company is strong enough to sustain the bussiness in case of recession. Good indicator too! :)

kampunginvestor said...

To me, for begineers, EPS + PE + Share Price will be good enough for you to make good money in the share market! ^^

Just my 2 cents!

No need to make life so complicated when investing as that 3 indicator is good enough d! ^^

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