EPS (Earnings Per Share) is the main fundamental indicator for long term investment in stock. For long term investment, an investor expects a mentionable dividend from his investment. Except dividend gain, an investor wants a suitable capital gain. So, investors have to think carefully to select a right company to invest hard earn money. In this case, EPS can relieve their tension.
What does EPS (Earnings Per Share) mean?
EPS indicates the earnings per share of a company. EPS 10 dollars for a company indicates that it has earned 10 dollars per share. This is the actual measurement for a company’s growth or failure. EPS negative for a company means it has made loss for the financial year.
How does EPS calculate?
EPS is calculated by a simple formula. Net profit/loss is divided by total number of outstanding shares. See the following example: A company’s earnings for the financial year is 100000 dollars. It has 10000 outstanding shares. EPS is 10 dollars (100000/10000). Similarly, if this company has net loss 10000, Its EPS is minus 1 dollar (-10000/1000). That means EPS may positive or negative.
How does EPS matter for long term investment?
For long term investment, an investor desires to get a suitable return from his investment. So, he tries to pick the best company to get dividend and capital gain. For this, he has to apply fundamental indicators to pick the right stock. If he does not know how to buy stock for long term investment, he will not get expected return from his investment.
In order to choose the right stock, he needs to calculate dividend yield and capital gain. For selecting the right stock, he has to know the EPS of his targeted company. If a company has low EPS, he will share little profit with its shareholders. Moreover, no earnings mean no dividend.
How to calculate Dividend Yield?
Dividend Yield is the actual return from an investment. Suppose RS company has 10 dollars EPS. This company has declared 50% dividend. Its per share market value is 100 dollars. Moreover, face value of a share is 10 dollars. Per share dividend is 5 dollars (10*50%). Dividend Yield is 5% (5/100)*100. This indicates that if you buy shares from this company at 100 dollars, you will get 5% return.
Although this company has shared 50% EPS, your actual return on dividend is 5%. Generally, a good company wants to share maximum profit with its shareholders. So, if a company has high EPS, you can expect high dividend yield. How to Save Money for Stock Investing-Beginner’s Guidelines
Why does 5% Return on Investment (ROI) from 10 dollars EPS?
Because Price to Earnings(P/E) ratio is high for this company. More clearly, market value is to high for this stock.
EPS and P/E ratio
Think about the previous example. Let’s calculate P/E ratio for RS company. Market Value/ EPS= P/E ratio. So, P/E ratio is 10 (100/10). This indicates that for 10 dollars investment, RS Company generates 1 dollar earning. But, your actual ROI depends on dividend yield. High EPS reduces P/E ratio. The lower the P/E ratio, the better for long term investment.
EPS and dividend yield
As a long-term investor, you have to consider both EPS and dividend yield. Try to find out how much your selected company shares as dividend and what is the dividend yield to take buying decision. On the contrary, you need to consider how much capital gain you may achieve from targeted company. High EPS doesn’t mean high return on your investment.
EPS and Capital gain
Let’s calculate capital gain from the RS company. Suppose you buy a share at 100 dollars. At the end of the year, your per share value is 120 dollars and you get the previous mention dividend. Your capital gain is 20 dollars (120-100). Capital gain percentage is 20% (20/100) *100. Hence, your actual return is 25% (5%+20%). That’s not a bad deal.
High EPS indicates high capital gain. Because high EPS has high power to catch investors to invest on this company. If the company can create positive impact, investors always try to buy and hold shares from this company. So, EPS has positive relation with capital gain.
Top 3 fundamental indicators for long-term investment: EPS, P/E, Dividend Yield
How to compare EPS for long term investment?
EPS should compare between two similar company. Generally, strong fundamental companies have high EPS and high dividend yield. First of all, you should select the strong fundamental sectors. Secondly, you should consider EPS among selected companies. Finally, pick the best company, which has both standard EPS and high dividend yield.
Does a company share whole EPS?
No. A fundamentally good company wants to share maximum net from to shareholders. But, a company has to retain earnings for future uncertainty and business expansion. A high EPS company may not share dividend if the company desires to implement a new plant or start a new venture. Similarly, it may want to reinvest net profit in any profitable business. Hence, high EPS doesn’t mean high return in some cases.
How does EPS reduce risk for long term investment?
A company’s high EPS means it is fundamentally strong company. Investors has positive attitude for this company. A good dividend providing company is the first priority for investment. Even in downtrend market, investors don’t lose hope to sell at loss. So, high EPS company has low risk to lose capital.
What is the negative EPS impact?
Negative EPS creates a negative impact on investors. Investors don’t like to invest on negative EPS company. Moreover, negative EPS companies are highly risky. For long term investment, you should not buy share from those companies, which can’t earn profit.
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To Sum Up
For long term investment, Firstly, you should consider EPS. Secondly, compare EPS among different sectors, Thirdly, calculate P/E ratio. Fourthly, find out dividend yield. Fifthly, calculate probable capital gain. Finally, buy near 52 weeks lowest price. These are the hidden tips to invest in stock to get maximum return. After all, EPS the main indicator to choose the best company for long term investment.
Founder of The Financial Ask
