How to Use EPS and Forward EPS to Make Investment Decisions
What is EPS?
EPS, or Earnings Per Share, is a financial metric that indicates how much profit a company has earned for each outstanding share of its stock. It is calculated by dividing the company’s net income by the total number of outstanding shares.
EPS is an important measure of a company’s financial performance because it allows investors to compare earnings between different companies, regardless of their size or market capitalization. EPS is also a key factor in determining a company’s stock price, as investors often use EPS as a gauge of a company’s profitability and growth potential.
There are two types of EPS that investors should be aware of: Basic EPS and Diluted EPS. Basic EPS is calculated by dividing the company’s net income by the total number of outstanding shares, while Diluted EPS takes into account the potential dilution of earnings from the conversion of convertible securities, such as stock options and convertible bonds.
What is Forward EPS?
Forward EPS, on the other hand, is an estimate of a company’s future earnings per share. It is calculated by taking the company’s expected earnings for the next fiscal year and dividing that number by the total number of outstanding shares. Forward EPS is often used by investors to gauge a company’s growth potential and to predict future stock price movements.
Investors should be cautious when using Forward EPS as a measure of a company’s future performance, as it is only an estimate and may not accurately reflect the company’s actual earnings. In addition, Forward EPS can be impacted by a variety of factors, including changes in market conditions, competition, and regulatory issues.
In order to get a more accurate picture of a company’s financial health and growth potential, investors should consider a variety of other metrics in addition to EPS and Forward EPS. These may include revenue growth, profit margins, return on equity, and free cash flow, among others.
Final Thoughts
In conclusion, EPS and Forward EPS are important measures of a company’s financial performance and growth potential. However, investors should be aware of their limitations and use them in conjunction with other financial metrics to make informed investment decisions.
