An organisation’s income is usually the benchmark that is used to judge its success. In the previous articles, we spoke about the basic metrics to analyse when picking a stock, and this is the most fundamental one of the lot – a company should be making money if they are to do well and grow. As an educated investor, you understand that the devil lies in the details. Which is why we go deeper into this metric and see how we can understand it better.
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As the previous article mentions, EPS is the ratio of the adjusted income of the company (net income minus the preferred dividends) to the outstanding shares. Let’s walk through this with an example – two automotive companies – Ford and General Motors. When looking at their income alone you might think that Ford, with revenue of 155.9B is doing better than General Motors, with a revenue of 137.21B.
This is where looks can be deceiving and the EPS metric can help you decipher which one is a better investment for you. When looking at the EPS metric for these stocks we can tell that Ford is more likely the bad investment.
Why? You may ask. This is because Ford has negative earnings per share. General Motors has a positive (and higher) earnings per share when compared to Ford – therefore, the better investment (at least with regard to EPS).
This metric is not always taken seriously by big-time investors as there are many ways to make this number look better than the actual status of the company. Nonetheless, this is an important metric to look at when picking a stock. Another item to check is the type of EPS you are looking at. There are three types:
- Trailing EPS: As the name suggests, it is calculated based on the previous year’s results. This is sometimes referred to as the ‘true EPS’.
- Current EPS: It is calculated based on a projection of the current year’s results to date.
- Forward EPS: This is an estimate of this metric for the coming year(s) based on the prevalent trends.
Now that you have a good grasp of the Earnings Per Share metric, feel free to try your hand at investing using the free eToro Demo Practice Account.
This Article is Part of A Total guidance list on How to pick individual stocks, make sure you go by the article one by one to get a bigger understanding of the total picture. 😉
- How to Pick an individual stock Part 1 - The Strategy
- How to Pick an individual stock Part 2 - 5 metrics to look at when stock picking
- How to Pick an individual stock Part 3 - P/E Ratio (Price-Earnings ratio)
- How to Pick an individual stock Part 4 - Earnings Per Share
- How to Pick an individual stock Part 5 - Dividend Yield
- How to Pick an individual stock Part 6- Company History And Strength
- How to Pick an individual stock Part 7- Debt-Equity Ratio
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