Hi
In this video we will talk about the Earnings per Share ratio and how it affects the price of a stock.

Hi
In this video we will talk about the Earnings per Share ratio and how it affects the price of a stock.
Earnings per Share popularly known as the EPS ratio, is a type of an accounting ratio used by fundamental analysts. It is considered to be one of the most important ratios which help realise a stock price or value.

As the name EPS suggests, it is a measure of how much 1 stock has earned or lost over a particular time period.
It is calculated by dividing the net profit of a company by the total number of outstanding shares of that company.

So for instance, assume a Company announces a profit of 15 Lakhs for the year.
And the total number of outstanding shares of the company are 30 Lakhs.
Then the EPS would be 15 lakhs divided by 30 lakhs (15/30)
Which equals Zero point Five (0.5).
But this is a basic method of calculating EPS.

As an investor it is important that you go through the balance sheet of the company to check whether the company has done any
– Share buybacks, paid dividends to preference holders or made any exceptional gains or losses for that time period.
This is because these actions may result in an increase or decrease in the EPS value and may not represent the real value.
Suppose, if a company does a share buyback, then the number of outstanding shares would reduce. This would result in an increase in the EPS value even though the net profit remains the same.

Now let’s understand how the EPS could affect the share price.
Many times, if the EPS has increased after the company announces new results, the share price might not increase.
This happens as analysts have already forecasted the results in advance and hence the markets have already discounted this news.
But in case the EPS comes in above the expectation of most analysts, then you can be sure to see a rise in the price of the share.

For instance,
Laurus Labs Limited had announced their Q1 FY-21 results on 30th July. The results were far better than what most analysts had expected.
The next day the stock which was trading at Rs.780 gained 150 points and ended at Rs.930.
At the same time, if the EPS calculated is below expectations, then the price of the share may fall.
EPS is one of the many fundamental indicators you can use to invest in stocks. It shows how much the markets are willing to pay for each rupee of earnings.
Also remember that the higher the EPS the better it is for your investment.

Thank you for watching!