Earnings per share or EPS plays an important role in determining the prices of stocks. EPS provides the profit generation from for investors. However, EPS sometimes can be misleading since it doesn’t show the capital invested in generating profit. For example, a company might use certain number of capital to generate profit but another company might use twice as much capital to generate the same profit. However, the concept of capital usage doesn’t show up in calculating EPS.
Type of EPS:
There are different types of EPS used in various industries. However, the most common ones are Trailing EPS and rolling EPS. Trailing EPS is the sum of a company’s EPS for past four quarters or a year. Rolling EPS considers sum of a company’s EPS for past two quarters and future two quarters.
Assume that a company has net income of $3 Million. If the company pays out $500,000 in dividends of preferred stocks and has a average of 1 million outstanding shares than what is their earnings per share.
EPS = Net Income ($3,000,000) – Dividends of preferred stocks ($500,000) / Outstanding Shares 1,000,000
EPS = $2.95
Return on Assets (RAO)
Earnings Per Share (EPS)
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