# 3. EPS – Earning Per Share

## Earnings per Share – Critical Fundamental Analysis

Stay motivated, not long to go now before you understand a key concept in deciding if a stock is worth your money.

We should now look at Earnings Per Share. If you are a beginner to trading, I advise you to read all preceding articles to this one.

This is your vital “WMD” for “fighting the war against blowing your hard earned cash down the toilet”

## How is Earning Per Share (EPS) Calculated?

Generally EPS is calculated like this:

Basic EPS

EPS = (Profit – Preferred Dividends) / Weighted Average Common Shares

Another common EPS calculation is:

Net Income EPS

EPS = (Net Income – Preferred Dividents) / Average Common Shares

## How do I interpret EPS?

It is used to determine is over time the company is earning more or less per share issues.

The common shares part of the calculation is there to provide a normalization factor to give a relative meaning to the earnings numbers.

So here is a little Challenge to get us into the swing of things…

### The EPS Challenge. Earnings Per Share. Which is better?

Take a look at the EPS of the two imaginary companies below, which would you invest in?  Assume the number of outstanding shares is the same throughout the period.

Company A – Big Balls & Co – Leather Balls Manufacturer
Q1 EPS = 1.50\$
Q2 EPS = 0.10\$
Q3 EPS = 1.50\$
Q4 EPS = 2.00\$

Company B – Small Spanners Inc – Tool Manufacturer.
Q1 EPS = 0.20\$
Q2 EPS = 0.30\$
Q3 EPS = 0.60\$
Q4 EPS = 1.50\$

You may be tempted to say well Company A has a bigger Q4 EPS of \$2 and has made \$5.10, for the year.
Company B only made \$3 for the year and has a lower Q4 EPS.

However, the key to fantastic stock price upward movement is ACCELERATING EPS.

Now let’s look at the table again to review what the % increases in EPS where for both companies.
Company A – Big Balls & Co – Football Manufacturer
Q1 EPS = 1.50\$
Q2 EPS = 0.10\$ – 93%
Q3 EPS = 1.50\$ – +1400%
Q4 EPS = 0.75\$ – -50%

Company B – Small Spanners Inc – Tool Manufacturer.
Q1 EPS = 0.20\$
Q2 EPS = 0.30\$ – +50%
Q3 EPS = 0.60\$ – +100%
Q4 EPS = 1.70\$ – +183%
My recommendation, would be company B. for the following reasons.

1. Company B is consistent unlike Company A Company B shows strong solid consistent growth without interruption.
2. Company A had its EPS drop from \$1.50 to 10cents unless this is seasonally expected, this shows the company has some financial difficulty.
3. Although Company B shows smaller EPS in Q4 its rate of Earnings Acceleration would mean by Q1 or Q2 next year it would exceed company A.

OK, I hear you say…..then show me a pretty picture, so I can visualise what you mean.

Well I will Show you two.

Microsoft EPS, (pre World Dominance)
MSFT, showed Accelerated earning before it’s stock exploded in 1987.

TeleChart2000 chart courtesy of Worden Brothers, Inc.

If you had invested \$1000, in 1987, you would have made one of the finest investment decisions of your life. Because 13 Years later, it would be worth \$6,750,000, Yes 6.75 Million Dollar. That is easy money.

### SQM EPS Acceleration: Chilean Producer Of Speciality Plant Nutrients & Chemicals

Also, here is potentially one for the FUTURE. A stock that is today, showing Accelerating Earnings Per Share. Also, absolutely solid Earning over the past 2 years, Quarter on Quarter, Year on Year.

Image from https://bigcharts.marketwatch.com/ (Select Charts – interactive Charts – Lower Indicator “RollingEPS”)

I hope this helps you to understand the most important Fundamental Measure of a Company, and how important it is.

If you get tips from your Financial advisor, postman, workmate, or pals on facebook, now you can simply look at the EPS, and decide for yourself if the company meets the Accelerating EPS Challenge.