EPS (EARNINGS PER SHARE)

Earnings per share, or EPS, is the first quantitative factor that should be taken into consideration when performing fundamental analysis on a company to determine whether or not its stock is likely to move up or down in value. The earnings per share of a company is, quite simply, the annual profits of the company divided by the number of shares released.

For example, if a company has annual earnings in 2009 of $45 million, and there are one million outstanding shares, then the company has an EPS of $45. This is a critical benchmark in measuring the performance of a company, and when compared to the market value of the stock it can indicate whether a stock is over- or under-valued.

It is important to look not only at the EPS of a company for a single year, but to analyze averages to get a better feel for the position of the company. Most analysts look at a three to five year average to see how the company is performing. For established companies, comparing the EPS of a current three to five year average with a past three to five year average can help to understand how stable the stock price is. Generally, one wants a stock price to demonstrate a high level of stability, with growth coming at a steady rate, rather than surging up periodically and then leveling out or dropping off.

As an example, if a company has earnings of $45 million in 2009, $42 million in 2008, $52 million in 2007, and $47 million in 2007, and the same one million outstanding shares all four years, then the EPS for that period would be $46. If the same company had earnings of $29 million in 1999, $34 million in 1998, $24 million in 1997, and $18 million in 1996, and at that time had 750,000 shares outstanding, the EPS in that period would be $35. Analyzing this, one can see that the EPS is relatively stable, but also that it is steadily increasing overtime, making the stock a strong buy.