Earnings Per Share (EPS) explained
Stock investing is never an easy thing to do especially when it comes to picking which stock to buy. That’s why the experts come out with all types of calculation in order to help them (and us) in their decision making process.
One of the calculations or method to pick stock is by studying the Earnings Per Share (EPS) of a company. There are actually few types of EPS calculation but the most common one would be:
EPS = Net earnings / Outstanding shares
For example, you get to choose between company A and company B. Both of them have a net earning of $100. Company A has 50 outstanding shares while Company B has 10 outstanding shares. Which one do you think is a better choice? Company A = 100/50 = 2 (EPS) and Company B = 100/10 = 10 (EPS). Of course company B is a better option with the higher EPS rating.
However, bear in mind that this EPS method should only be used for comparing companies in the same industry. There’s not much point comparing Air Asia and IOICorp when both of them are in totally different industries. It makes much more sense to compare IOICorp and SIME using EPS. But is this the 100% correct method to use when doing stock picking?
No. It’s just one of them. You should be aware of few other things as well.
- The previous EPS for the company.
- The current EPS, which is what you’re calculating.
- Future EPS, the projection.
Good companies are those with a steady increase in EPS over the years. If you make it into a graph, it should be a consistent line going upwards. Ignore those “extreme” ups since those could be affected by the market trend (for example, the CPO reached its peak few months ago, thus the plantation companies will have a higher than normal EPS rating). As long as they have consistent upward trend in EPS, I believe the companies are considered OK-to-GOOD.
Another thing to note though, is that the EPS can be changed if the company decided to buy back their own shares. Net earning = RM 100, but outstanding share dropped from 10 to 5. That will increase their EPS significantly. So try to keep an eye on the news, to see if they are buying back their shares actively. That should be taken into consideration when you are picking your stock.
Hope it helps. If I’m wrong in the above article, please correct me. I’m still learning 
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