When conducting technical analysis on a company and determining whether they fit your criteria for investing, you have no shortage of metrics at your disposal. You can consider a company’s P/E ratio, EBITDA, ROE, etc. But, perhaps the most important of all? EPS.
Wait – what is EPS in the stock market, exactly? That’s exactly what you’ll discover in this blog post. We’ll explain what earnings per share is, and why you need to use it regularly as an investor. Earnings drive the direction of the market, after all – so you can stay up on earnings as an indicator for what’s to come. Of course, if you currently have open positions in companies, staying up on earnings is of the utmost importance.
In this in-depth guide, you’ll learn how to calculate EPS and use it to make informed decisions. We’ve got a lot to cover – so let’s not waste any more time.
What is EPS in the Stock Market?
Put simply, EPS is short for “earnings per share.” It’s a metric that tells you how much profit a company has generated per each outstanding share of their stock. In order to calculate EPS, you just need to take a company’s net income and divide it by the number of shares they have outstanding. Simple enough, right? Here’s how it looks in practice:
For example – let’s say Company XYZ has a net income of $100,000 and 100,000 shares outstanding. Their EPS would be $100,000/100,000 = $0.01 or one penny per share.
It’s important to note that there are different types of EPS – but we’ll get into that later on in this guide. For now, let’s focus on the basics – what is earnings per share going to tell you, exactly?
What is Earnings Per Share Going To Tell You, Exactly?
Now that you know what EPS stands for in the stock market, it’s time to discuss why this metric matters. After all – there are a lot of valuable swing trading indicators out there. So, what separates EPS from the pack? When conducting your analysis, you should always keep an eye on earnings. Here’s why:
- EPS is one of the most important drivers of stock prices. If a company reports strong earnings, their stock price will likely increase. On the other hand, if they report weak earnings…you can guess what happens next. For this reason, it’s important to always be up-to-date on a company’s EPS before making any decisions.
- Earnings in general drives the stock market. As we discussed in our article on how the stock market works, earnings are the #1 indicator of the market conditions as a whole. When earnings are strong, the market is in a good place. As earnings start to drop overall, the market begins to turn. Of course, interest rates and inflation also play a role here – but earnings are the best way for investors to stay up to date with current market conditions.
- It provides insight into a company’s profitability. A company can have a strong balance sheet and be generating revenue – but if they’re not profitable, their stock price will eventually suffer. EPS is one of the best indicators of profitability, which is why it’s so important.
- It gives you an idea of what kind of return you can expect as an investor. If a company has a high EPS, it means they’re profitable and their stock price is likely to increase. This means you could see some nice returns on your investment. On the other hand, if a company has a low EPS…you might want to think twice before investing.
Now that we’ve answered the question “what is EPS in the stock market,” it’s time to move on to the next topic. Let’s discuss how you can use EPS to make informed decisions when investing.
The Different Forms of EPS Explained
As we briefly mentioned before, there are different types of EPS. Here’s a quick overview of the most common forms:
- Basic EPS: This is the most commonly cited form of EPS, and it’s the one we’ve been discussing so far. It simply takes a company’s net income and divides it by their outstanding shares.
- Diluted EPS: This is a slightly more complex form of EPS, and it takes into account both stock options and convertible securities. In other words – it paints a more accurate picture of a company’s true earnings power.
- Core EPS: Core EPS strips out certain one-time items that can skew a company’s overall profitability. This includes things like restructuring charges, goodwill impairments, etc. This is the most accurate form of EPS, in our opinion.
As you can see, there are different ways to calculate EPS. And depending on the type of investor you are, you might place more emphasis on one form over another. For example, value investors might prefer to use basic EPS, while growth investors might prefer diluted EPS. It all comes down to your investment strategy.
How to Use EPS in Your Analysis
Now that you know what earnings per share is and why it’s important, it’s time to put this knowledge into practice. In this section, we’ll discuss how you can use EPS in your analysis to make better investment decisions. There are three ways you can use EPS to your advantage as an investor:
- Keep an eye on the overall market climate. If earnings are strong across the board, it’s a good time to be investing. On the other hand, if earnings are weak…you might want to sit on the sidelines for a while. You can stay up-to-date on earnings by following financial news outlets and subscribing to earni
- Check out a company’s EPS over time. This will give you a good idea of their overall profitability. If they’re consistently reporting strong earnings, it’s a good sign. On the other hand, if their EPS is all over the place…you might want to think twice before investing.
- Compare a company’s EPS to their competitors. This will give you an idea of how they stack up against the competition. If they have a higher EPS, it means they’re more profitable and their stock is likely to perform well.
As you can see, there are different ways to use EPS in your analysis. And depending on your investment strategy, you might place more emphasis on some factors than others. But one thing is for sure – if you want to make money in the stock market, you need to understand EPS.
What is EPS in the Stock Market? Wrapping up Our Explanation of Earnings Per Share
In conclusion, EPS is a key metric to watch when investing in the stock market. It’s a good indicator of a company’s profitability, and it can be used to make informed decisions about where to invest your money. So keep an eye on earnings reports, compare EPS between companies, and use this information to your advantage as an investor. Doing so will help you achieve success in the stock market.
Because earnings are such an important aspect of the stock market, we use them heavily in our analysis here at VectorVest. We derive the value of a stock using forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. And, we use earnings as a way of gauging current market sentiment. Having these insights at your fingertips at any given time is just one of the many reasons investors prefer to use our stock analysis tools.
Having VectorVest in your arsenal eliminates any guesswork or emotion from investing. We’ve been ahead of the market for over 30 years and counting – and now, you can be too. With our software, you gain access to insights that you’d otherwise have to spend all day finding. You can easily see the overall market sentiment at any given time. And, you can get our recommendation on any given stock – with a clear buy, hold, or sell rating – and why we deem it to be as such. You can see what the hype is all about with a 30-day trial. Or, get a free stock analysis here to see how we incorporate earnings into our analysis.