To make sure that we can properly explain how the earnings per share (EPS) formula will help you with trading, we must first have a look at what the earnings per share formula does, and the various ways in which it has been used over the years since its creation, by investors and potential investors alike. The EPS formula can allow you to get an idea yourself of whether or not a company has been profitable in the past, is profitable at the current time, and to make a prediction as to whether or not you think it will be profitable in the future at any point. This is because the earnings per share value after calculation is able to show you the amount of a company’s profit which has been set aside to paying back to their shareholders. In different terms, it refers to the amount of money that a company has dedicated to its outstanding shares. Outstanding shares are shares that are for a company, but are not owned by the company. For example, if Company 1 were to be set up by two people and they were the two sole shareholders in the company, then Company 1 would have no outstanding shares. However, if say in one or two years time Company 1 were to offer people the opportunity to buy into their company and people did so, then Company 1 would now have outstanding shares, as there would be other shareholders in the company besides the two original founders. Click here to learn more on EPS!
At this point, you might be asking yourself the question, why does the amount that a company as dedicated to their outstanding shares really matter? Well, it matters for a great number of reasons. The amount that a company is able to dedicate to the outstanding shares (shares that other people own because they have bought into the company) is reflective of how much profit they are making. If a company are able to dedicate a large amount of funds to their outstanding shares, then it suggests that that company are doing well in terms of the amount of profit that they are making. This is the case since, if the company were not making profit and were not doing well, they would not be able to dedicate as many funds, if any at all, to those shares that they have outstanding. This is not unfair – it is the nature of the stock market and investing. If you are not able to lose the money that you are about to invest, do not invest it! When potential investors are considering making a financial investment in a company, they should consider a vast number of factors – not just whether or not they can afford to. They should look at the fluctuating stock prices of the company, as well as any recent successes or failures that the company has had that could have an impact on the value of the company or the company’s share price. If one is unsure as to the effect that recent happenings could have on the future stock price of an organisation, they could either look into the past and look for a similar happening and examine what happened to the stock price at this stage, or they could take the risk and make their investment, hoping for the best. However, let us take a look at how the earnings per share formula will help you with trading.
Why? So what really is the purpose of the earnings per share formula and why does it exist? The eps formula exists to show investors and potential investors the volume of profit that a company has dedicated to the outstanding shares that they have. This can be helpful to investors should they be trying to make a decision as to which company they would like to invest in. If a company has a very high, respectable earnings per share value, it shows that they are able to dedicate a larger amount of their profits for the year to paying out to their shareholders. This means that the company knows that they are doing well – they are profiting, and have positive views to the future of their finances, and company as a whole. This suggests that the company is in a good financial position since, if a company were not in a good financial position, they would not be In a position to be dedicating large amounts of profits to their shareholders – they would instead need this money to invest into their business, or to help covering their losses. So, from this point of view, the earnings per share formula will help you with trading in that it will point you in the direction of the more profitable company to invest in.
All of the above said, even if a company is not in profit at the current time according to the earnings per share value at the time, it does not necessarily mean that they would make for a bad investment. The eps formula can help you make wiser decisions as to the better investment to make based upon which company’s are the most profitable at the present time.
The earnings per share value also comes in two other forms – these are the trailing EPS an the forward EPS. The trailing EPS uses past data from the company to calculate the earnings per share value for whichever time period is being examined. Trailing EPS can provide useful information on the previous endeavours and profits of the company, but cannot however give information on how the company might do in the future. It can however provide a grounds for prediction. The Forward EPS value can indicate how profitable people think a company is going to turn out to be in the future – this can be extremely helpful in terms of your investment in that, should the forward EPS value of the company be bad for whatever reason, it may help you to avoid an otherwise bad investment.