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How to evaluate the stocks potential with their earnings per share formula?

Investing in the stock market can be a lot of fun, and a lucrative way to maximize profit potential on your spare...

avatar Written by Robin Khokhar · 3 min read >
evaluate the stocks

Investing in the stock market can be a lot of fun, and a lucrative way to maximize profit potential on your spare cash, however, it’s not without risks. However, while the obvious truth is that just like in any other, no investment in this arena can be guaranteed to be positive either once or the majority of the time there are ways to reduce the risk of losing out.

Largely this involves planning to hold a diverse portfolio which encompasses several different sectors and taking the time to research and evaluate the stocks which are up for consideration. However, with many thousands of stocks to consider it would be impossible to actually check out every single company report or income statement for any significant number of them.

Ultimately this logistical consideration means you need a plan B, a way to quickly identify which stocks have real potential for you and are worthy of further investigation.

Ways to narrow the field

  • Decide what you want to achieve from investing. Your portfolio should be focused on stocks which reflect your major goals. Whether that’s to make a decent income, invest in stocks which will likely appreciate in the future, or trade lower returns for more stability.
  • Keep an ear to the ground. This involves talking to the right people, reading as much as you can about current affairs which could affect the market, and being aware of what is going on in the business world in general.
  • Compare the earnings per share results of stock between several contenders for your cash. Then use the information received to evaluate their worth and decide if they would be a good buy.

This is where we start the practical part of this article – with a brief guide covering how to looking at earnings per share stats can help inform your decision on buying stock.

What is a stocks ‘earnings per share’ [EPS] formula?

This is a common method of awarding an instant valuation to stock, and the number awarded is reached by a simple calculation.

A company’s net income is calculated and then divided by the number of shares that are outstanding. When looking at EPS results for a couple of years growth of any size is always good, while anything recording a 25% plus EPS on the previous year is considered very good and presumed to involve a commodity with unlimited demand.

When you are working through your shortlist and find a company with a positive-looking earnings per share figure it’s definitely an exciting moment, but to evaluate the stock’s true worth to you involves being a little more cool-headed. Next, you need to:

  • Look at how the current figure compares to those of previous quarters or years. Is it steady, or does the figure show some instability or possibly mixed fortunes? You can always check out the reasons for some unusual result f you are keen on the stock, but don’t get carried away if the business profits seem unusually volatile.
  • Take the EPS rating scheme into account. IBD EPS rating analyzes a company’s performance, growth, and stability over three years before assigning a performance score ranging from 1 to 99. (99 is fantastic.). Where this falls down a little is when a company s fairly new – it will lack the high numbers simply because it didn’t exist when parameters were put in place. Working on numbers alone, a one or two-year trading history can never compete against a well-established company because they start from different points.
  • Don’t overlook IBDs other rating systems, which include:

–          RS (Relative Strength) rating which reflects how the stock’s price did in the last year compared to others. Ranked from 1 – 99, with 99 being the absolute best, a score above 80 is great.

Be aware there are different types of earnings per share results.

Of course, the basic point of the EPS figure is to indicate how much profit has been generated by a company after monies for taxes have been set aside, and ultimately how much will be paid in profit dividends per share, but there is more than one type.

Standard EPS

This is the term we have focused on today, and as we mentioned earlier it is a simple calculation; you just need to know the net income and divide that by the number of shares issued. So if Company A reports 1 million USD profit and has 1 million shares issued each would attract a $1 profit.

Diluted EPS

This is the dividend paid out if all possible securities which could be converted, such as warrants and stock options were deducted from the net profit before dividing the figure between the number of issued shares.

Adjusted EPS

This is the one to be wary of as it is not generally a real representation of the stock’s worth because it is reached by removing lots of losses due to them not being related to key activities. It’s a little like cheating but it is allowed.

If the world of earnings per share sounds appealing to you Click here to check it out. There’s always something new to learn! In the meantime approach this issue with caution. It’s pretty easy to big things up without revealing the possible pitfalls ahead, so this really is a field investors need to enter with caution and an awareness of the nature of the game.

Written by Robin Khokhar
Robin Khokhar is an entrepreneur and blogger who runs this blog. Thus sharing the tips and tricks related to SEO, WordPress, blogging, and digital marketing. You can follow him on Twitter @jacoblucky3.
       
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