Earnings per share (EPS): A guide for investors seeking to understand key indicators

In stock investing, studying financial indicators is unavoidable. “Earnings Per Share” or EPS (Earnings Per Share) is one of the most popular metrics in the investment community because it helps investors clearly understand a company’s profit potential.

How to Use EPS in Investment Decision-Making

Investors should not rely solely on EPS as the only indicator but should use it as part of a broader analysis. The first step is to compare the EPS of the company of interest with other companies in the same industry, as well as to observe the trend of this figure over time.

Analyzing the long-term trend of EPS will reveal the company’s true efficiency and growth. Additionally, it is important to investigate the reasons for changes, whether due to increased profits or reduced expenses, and consider whether these trends will continue.

What is EPS and How Is It Calculated?

EPS stands for Earnings Per Share, which indicates the ratio between the company’s net profit (after deducting expenses, interest, and taxes) and the number of shares outstanding.

Basic calculation formula:

EPS = Net Profit / Number of Shares Outstanding

However, the official calculation often uses:

EPS = Net Profit / Average Number of Shares Outstanding During the Year

Example of EPS Calculation in Real Situations

Suppose PTT has a net profit of 91,174.86 million baht and 28,562.9963909774 million shares outstanding. The EPS calculation would be:

EPS = 91,174.86 ÷ 28,562.9963909774 = 3.19206216155 baht

This indicates that each share generates a profit of 3.19 baht.

How to Find EPS Data via the Stock Exchange Website

For those who prefer not to calculate manually, you can visit the SET website, go to the search section, type the stock ticker, select the company, and look for the EPS in the “Key Financials” section.

Differences Between Basic EPS, Diluted EPS, and Adjusted EPS

When studying EPS, investors will encounter different forms of this indicator, each serving different purposes.

Basic EPS is calculated by dividing net profit by the total number of shares issued, excluding any additional purchase rights or valuation adjustments.

Diluted EPS includes potential shares such as preferred shares or stock options, providing a more conservative view if these are converted into common shares.

Adjusted EPS involves financial adjustments to reflect the company’s core performance, excluding irregular or one-time items such as gains/losses from asset sales.

How to Use EPS in Analyzing Other Indicators

( PE Ratio: Valuation measure

PE Ratio = Market Price per Share / EPS

This indicator shows how much investors are willing to pay for one baht of the company’s earnings. The lower the PE ratio, the cheaper the stock appears under the principle. For example, if the stock price is 100 baht and EPS is 10 baht, the PE ratio is 10.

) EPS Growth: Growth assessment

EPS Growth = (###Current EPS – Previous EPS###) / Previous EPS × 100

This metric shows how much earnings per share have grown over a specified period. If EPS changes from 8 baht to 12 baht, the EPS growth is ((12-8)/8 × 100 = 50%).

( Dividend Payout Ratio: Dividend policy indicator

Dividend Payout Ratio = )Dividends per Share / EPS### × 100

If a company pays 10 million baht in dividends and has a net profit of 50 million baht, the Dividend Payout Ratio is (10/50) × 100 = 20%, meaning the company distributes 20% of its profit to shareholders and retains the rest for reinvestment.

Limitations Investors Should Be Aware Of

Although EPS is a useful indicator, it has several limitations.

First, EPS does not reflect the risk associated with the investment. A company may have a high EPS but also high debt levels or volatile business operations.

Second, EPS is historical data and cannot fully predict future performance. A company with a good EPS in the past may face new challenges.

Third, EPS can increase due to stock buybacks (Stock Buyback), which reduces the number of shares outstanding, without increasing total profits.

Additionally, EPS does not reveal the true quality of profits. A company might inflate profits through accounting adjustments or one-time gains.

What Should a Good EPS Look Like?

Saying that EPS is “high” is not enough to conclude it is good; multiple factors should be considered.

First, compare EPS with the company’s historical trend. Consistently increasing EPS over several years is better than a high but unstable EPS.

Second, compare EPS with other companies in the same industry. An EPS of 50 baht might be excellent for one company but low for another in the same sector.

Third, consider the PE ratio. A stock with EPS of 100 baht but a PE ratio of 40 might be more expensive than a stock with EPS of 50 baht and a PE ratio of 15.

Finally, assess the quality of profits—profits derived from core business growth are preferable to those from asset sales or accounting adjustments.

Summary

EPS (Earnings Per Share) is a valuable tool for investors to understand a company’s profitability. However, it should not be used in isolation. Investors should consider EPS alongside other indicators such as PE ratio, Dividend Payout Ratio, Return on Assets (ROA), and other financial metrics.

When analyzing EPS, look at the trend, assess profit quality, and compare with competitors. This approach will enable investors to make more informed decisions and increase their chances of successful investments.