Earnings Per Share

The Earnings per share or EPS is simply the amount the company is worth per share of stock. It is calculated knowing the net earnings and the price of a stock.

The Earnings per share is found by using the formula EPS= Net Income/Number of shares. For instance if the company had an income of $50 million and has 20 million shares the EPS would be $50 mil/20 mil or 2.5.

This is considered a very important indicator when compared with the price of a stock according to fundamental analysis.

One thing you should remember is that the number of shares can change over time. If there are extra call options which people use or if the stock splits that can bring more shares into the market and that can make the EPS look worse. Because of this it is important to take the average amount of shares when trying to determine the EPS.

Using The Ratio

While by itself it does not have much important, you can plug it into other ratios and get information on the company. One of the most common fundamental ratios out there is called the PE ratio and it stands for the price to earnings ratio.

This ratio is used by dividing the price of the stock by the earnings that the company makes per share of stock.

For instance, if the stock is worth $45 and the EPS is $5 that means the P/E ratio is $15. That number can be compared with other similar companies to give you an idea of how well off a company is when you look at other companies.

This is one of the most important indicators which is used very regularly by investors to determine where a stock will move in the near future.

Other Fundamental Indicators

Below are some other ratios to look at when deciding if a stock is worth the investment or not.

Cash Current Debt Coverage – This looks at a company’s short term debt

PEG ratio - This ratio used the PE ratio to determine the future earnings of a company

Return on Capital Employed – This looks at the money a company invest into itself and what happens with it