EPS – The most important fundamental of all

EPS – The most important fundamental of all

For value investors, one of the most important components in stock analysis is fundamental analysis as it helps investors choose only financially-viable companies to invest in.

In this article, we will focus on one of the most important fundamentals of all, i.e. profits. In any business, generating revenue and making money from it is the only way to survive and getting the business to keep running in the long term.

When you invest in shares, you are effectively a business owner of the company, and therefore must want your company to make profits. However, just looking at the profit figure is not the best way. A more accurate indicator is earnings per share (EPS).

EPS is the portion of the company’s profit allocated to each share. It is calculated by taking the net profit divided by the total number of outstanding shares issued.

EPS = Net Profit ÷ Total Number of Outstanding Shares

Imagine you are analyzing two companies and intend to invest in only one of them. However, both companies are having the same profit of RM25 million. In this case, you are not sure which company is outperforming. EPS is the way to measure it.

Let’s look at the following:

 

Company ABC

Company XYZ

Profit

RM25,000,000

RM25,000,000

Number of outstanding shares

100,000,000

150,000,000

Earnings per share (EPS)

RM0.25

RM0.16

Even though Company ABC and Company XYZ have the same profit figure, but due to the different number of shares base, the EPS of Company ABC is higher than Company XYZ.

The stronger the EPS, the better the performance of the company, and theoretically, the stock enjoys better price performance. Likewise, companies with weak EPS numbers will have weak stock price performance.

In short, the EPS of the company will affect the price action. Factors determining EPS of the company include sales, costs and expenses.

EPS data of listed companies can be found on our trading portals www.osk188.com and www.rhbinvest.com

Where to get the data?

For RHBInvest users: After login, right-click on any stock at “Trade” or “Market Info” page, and select “Share Insight” to get the profit and EPS data.

For OSK188 users: After login, select any stock and click the “Database” button, a window will pop out. Answer a simple math question to get access to the EquitiesTracker website and find out the Profit and EPS under “Financials” > “5 Yr P&L”. For number of outstanding shares, click on “Shareholding” to get the data.