Even comparing the earnings of one company to another really
doesn’t make any sense, if you think about it. Earnings will
tell you nothing about how many shares the company has. Because you do
not know how many shares a company has, you do not know how many parts
that companies earnings have to be divided into. If the company has
more shares, the earnings will be divided into more parts.

For example, companies A and B both earn Rs.100, but company A has 10
shares outstanding, so each share holder has in effect earned Rs.10.

On the other hand, if company B has 50 shares outstanding and they too
have earned Rs.100 then each shareholder has earned Rs.2. So you see it
is important to know what is the total number of outstanding shares are
as well as the earnings.

Thus it makes more sense to look at earnings per share (EPS), as a
comparison tool. You calculate earnings per share by taking the net
earnings and divide by the outstanding shares.

EPS = Net Earnings / Outstanding Shares

So looking at the EPS ratio, you should go buy Company A with an EPS of
10, right? EPS is not the only basis of comparing two companies, but it
is one of the methods used.

Note that there are three types of EPS numbers:

- Trailing EPS – last year’s numbers and the only actual EPS
- Current EPS – this year’s numbers, which are still projections
- Forward EPS – future numbers, which are obviously projections

EPS doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some other ratios next....

Next - Price to earnings ratio (P/E) ratio & what is it? >>

<< Previous - Basics of fundamental analysis!

Other articles YOU
may like... How to make money in the stock market? How to manage your money? How to buy a flat? How to buy land? How to speak English fluently? |

- What are stocks?
- Why do companies issue stocks?
- What causes stock prices to change?
- What are the Sensex and the Nifty?
- 3 important things that every investor MUST remember!!
- How to decide which stocks to buy?
- Basics of fundamental analysis!
- Earnings
per share (EPS) ratio and what it means?

- Price
to earnings (P/E) ratio and what it means?

- PEG
ratio and what it means?

- Inflation
and how it silently eats your money!

- Brokerage and taxation…