Earnings per Share
Look For Growth Over Time!
What is earnings per share (eps)? It is the ratio of the net annual earnings of a company to the number of shares.
It is one of the common financial measures that all companies include in their annual reports, usually in graphical form.
How do I use it? I like to see the historical eps increasing over at least the last five years. More importantly, I foucs on eps growth.
Growth in eps is an important number as it provides an indication of the future prospects of a company. I focus on companies with an eps growth of at least 10 percent per year over a five-year period
Companies can increase their eps by either ...
- doing a better job at running their company
- buying other companies
- buying back some of their own shares to reduce the number of shares on issue by the company.
I find that good bargains can be found in smaller to mid-cap companies that have had a stock market historical performance of increasing eps and that have had a hiccup in the most recent eps report due to reasons largely out of their control.
There can be a variety of reasons why a temporary misfortune may arise, whether it be drought, currency fluctuations, spikes in fuel prices - or whatever.
The trick is to judge whether the upset is likely to be a temporary problem of limited time duration that the company can reasonably quickly recover from.
The market tends to punish these smaller companies more severely than larger companies by hammering the share price.
Presumably, this is because of their perceived reduced ability to recover from the problem. However, in most cases they do - and when they do, so does the corresponding value of my portfolio.
Return from Earnings per Share to Financial Measures
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