What is earnings per share (EPS) and how should it be utilized for investment benefits

EPS is an important stock analysis tool

For those entering the stock investment world, EPS (Earnings Per Share) or earnings per share is a necessary financial indicator for making buy or sell decisions. This metric shows how much profit a company can generate from each unit of stock held by investors. However, EPS is not the only indicator to consider when analyzing stocks. In this article, we will explore the meaning, usage, and limitations of this metric in depth.

What does earnings per share (EPS) mean?

Earnings per share (EPS - Earnings Per Share) is a financial ratio derived from the company’s net profit (Net Profit), calculated after deducting all expenses, including interest and taxes, divided by the number of shares issued and still held by shareholders (Outstanding Shares).

This indicator helps investors understand how much profit the company makes per share, reflecting management efficiency and profitability.

How to calculate EPS

Calculating EPS can be done using a simple formula:

Basic Formula

EPS = Net Profit (Net Profit) ÷ Outstanding Shares (Outstanding Shares)

However, official calculations per accounting standards often use the average number of shares over the period, especially when there are increases or decreases in shares during the year.

Official EPS = Net Profit ÷ Average Shares Throughout the Year

If you want to find the number of shares without precise data, you can use this formula:

Total Shares = Market Cap (Market Cap) ÷ Current Share Price

( Example Calculation

To clarify, consider three companies:

Company X: Net profit of 2,000,000 THB and 1,000 shares issued

• EPS = 2,000,000 ÷ 1,000 = 2,000 THB per share

Company Y: Net profit of 2,000,000 THB and 2,500 shares issued

• EPS = 2,000,000 ÷ 2,500 = 800 THB per share

Company Z: Net profit of 1,500,000 THB and 750 shares issued

• EPS = 1,500,000 ÷ 750 = 2,000 THB per share

From these examples, we see that even with the same profit, different share counts lead to different EPS. Company Z, despite having lower profit, has the same EPS as Company X because of fewer shares.

How to view EPS of a stock of interest

Investors do not need to calculate EPS themselves, as stock exchange websites like SET )The Stock Exchange of Thailand### usually display EPS data.

Steps to find EPS on SET:

1. Visit the SET website
2. Use the search box to enter the stock’s ticker symbol
3. Select the stock details, then scroll to the “Key Financials” section
4. EPS and earnings per share are displayed there

Using EPS to analyze other financial ratios

( 1. PE Ratio )Price-to-Earnings Ratio###

PE Ratio is the ratio of the current stock price to the company’s EPS. This helps investors assess whether the stock is fairly valued.

Formula: PE Ratio = Current Share Price ÷ EPS

A lower PE Ratio may indicate that the stock is undervalued relative to its earnings, presenting a potential investment opportunity, especially when compared to industry peers.

Example: If a stock is priced at 150 THB and EPS is 15 THB, then PE Ratio = 150 ÷ 15 = 10 times.

( 2. EPS Growth )Earnings Per Share Growth###

This metric measures the percentage increase in EPS over a specified period, usually year-over-year.

Formula: EPS Growth = (EPS current year – EPS previous year) ÷ EPS previous year × 100

A positive EPS growth indicates profit growth, and companies with high EPS growth and stable performance may have strong growth potential.

Example: If EPS in 2023 is 20 THB and in 2022 is 16 THB, then EPS Growth = (20 – 16) ÷ 16 × 100 = 25%.

( 3. Dividend Payout Ratio )Dividend Payout Ratio(

This indicator shows what percentage of net profit a company distributes as dividends.

Formula: Dividend Payout Ratio = Dividend per Share ÷ EPS × 100

Investors seeking dividend income may prefer companies with a high payout ratio, but should also consider the company’s retained earnings for future investments.

Example: If dividend per share is 5 THB and EPS is 20 THB, then Dividend Payout Ratio = 5 ÷ 20 × 100 = 25%.

How investors should use EPS in decision-making

) 1. Compare with industry peers

First, review the EPS of the company and compare it with other companies in the same industry or with its own historical data to identify trends.

( 2. Analyze long-term trends

Look at whether EPS has been increasing or decreasing over a period of at least 3 years, reflecting management strength and business stability.

) 3. Investigate reasons for changes

When EPS changes, check whether it results from genuine profit growth or from share buybacks ###Stock Buyback( or other factors.

) 4. Use with other indicators

EPS should be considered alongside other metrics such as PE Ratio, Dividend Payout Ratio, ROE (Return on Equity), and additional data for a comprehensive view.

Differences between Basic EPS, Diluted EPS, and Adjusted EPS

( Basic EPS )Basic Earnings Per Share###

Basic EPS is calculated from net profit divided by the actual number of shares outstanding, excluding potential shares such as warrants ###Warrants### or stock options (Stock Options) that could be issued in the future.

Diluted EPS (Diluted Earnings Per Share)

Diluted EPS accounts for potential shares from warrants, stock options, convertible bonds, etc. This calculation provides a “worse-case” scenario for EPS, assuming all potential shares are converted.

Adjusted EPS (Adjusted Earnings Per Share)

Adjusted EPS modifies the figure to reflect normal operating performance, excluding extraordinary items such as gains/losses from asset sales or one-time expenses.

Limitations of using EPS for stock analysis

( 1. Does not account for risk

EPS does not reflect underlying business risks. A high EPS company may still carry significant investment risks due to industry characteristics or management issues.

) 2. Past data only

EPS is based on past performance and cannot predict future results, as market conditions can change rapidly.

( 3. Not directly related to cash flow

Net profit does not always equal cash generated from operations. A company may have high EPS but insufficient cash flow, affecting dividend payments or investments.

) 4. Can be artificially inflated

Companies can increase EPS through share buybacks ###Stock Buyback(, reducing shares outstanding and thus increasing EPS without actual profit growth.

) 5. Should be compared with other metrics

Relying solely on EPS is insufficient; it should be evaluated alongside PE Ratio, PBR ###Price-to-Book Ratio(, growth rates, and other indicators.

What characteristics should a good EPS have?

superficially, a high EPS seems favorable, but this can be misleading.

A truly good EPS should have the following characteristics:

• Consistent growth over 3-5 years, indicating genuine expansion rather than just share reduction.
• Increase driven by actual profit growth, not merely share buybacks.
• Comparison with industry peers to see if the EPS level is high, average, or low.
• Reasonable PE Ratio, reflecting fair valuation.

Therefore, a comprehensive stock analysis should consider net profit, market value, return on investment, and other indicators holistically.

Summary

EPS or earnings per share is a valuable metric for stock analysis, but should not be used in isolation for investment decisions. It is essential to consider other financial ratios such as PE Ratio, EPS Growth, Dividend Payout Ratio, and business factors to obtain a complete picture and make more confident investment choices.

Investors should deeply understand the business and compare with other companies in the same industry to ensure their decisions align with their objectives and risk tolerance.