Investors need to know: How to use earnings per share (EPS) in making stock purchase decisions

When investing in the stock market, the key role of investors is to use a wide range of financial data to make decisions. One of the essential analytical tools is “EPS” or “Earnings Per Share,” which indicates how much profit a company can generate for each shareholder. However, EPS is like other tools with its advantages and limitations. This article will share how to correctly and comprehensively use EPS.

What do investors use EPS for? Learning to evaluate company quality

In the initial stage of investing, investors often compare the EPS of multiple companies to see which one is more profitable. This comparison can be done in two ways: either compare a company’s EPS with its industry peers or compare it with the company’s past results to see if the company is growing or declining.

Additionally, studying the trend of EPS over several years helps provide an overall picture of the company’s financial health. If EPS increases steadily, it indicates a stable and growing company. When changes occur in EPS, investors should dig deeper to find out whether it results from increased sales, reduced expenses, or other factors.

What is EPS? Explaining profit per share for understanding

EPS stands for Earnings Per Share, which is a financial formula that helps investors see how much profit a company makes per share.

Simply put, it is calculated by taking the company’s net profit (revenue minus expenses, interest, and taxes), then dividing by the total number of shares outstanding. The result is the EPS figure, which helps investors assess the company’s profitability.

The importance of EPS is that it makes comparing companies easier. Even if two companies have the same net profit, if they have different numbers of shares outstanding, their EPS will differ. This is crucial information for investment decisions.

How to calculate EPS: Understanding the formula and real examples

Basic EPS formula

EPS = Net Profit ÷ Number of Outstanding Shares

If you want to find the number of shares but don’t have the figure, you can use:

Total Shares = Market Cap (Market Cap) ÷ Current Share Price

Simple example of EPS calculation

Suppose there are 3 companies with different scenarios:

• Company AA: Net profit 1,000,000 THB ÷ 1,000 shares = EPS 1,000 THB/share
• Company BB: Net profit 1,000,000 THB ÷ 2,000 shares = EPS 500 THB/share
• Company CC: Net profit 500,000 THB ÷ 500 shares = EPS 1,000 THB/share

Interestingly, AA and BB have the same profit, but AA has fewer shares, resulting in a higher EPS. CC has lower profit, but because it has very few shares, its EPS is equal to AA.

Real company example

In the fiscal year, PTT announced:

• Net profit: 91,174.86 million THB
• Outstanding shares: 28,562.9963909774 shares
• EPS = 91,174.86 ÷ 28,562.9963909774 = 3.19 THB/share

If you don’t want to calculate manually, visit the SET website (The Stock Exchange of Thailand) > search for the stock name > check the “Key Financials” section (EPS will be displayed there).

Using EPS to calculate other indicators: Deep tools for investors

PE Ratio: Check if the stock is expensive or cheap

PE Ratio (Price-to-Earnings Ratio) = Current Share Price ÷ EPS

The PE ratio indicates how many years it would take to recover the investment. The lower the number, the more reasonable the stock price appears. When comparing with the company’s past, industry average, or market average (.

Example: Share price 100 THB, EPS 10 THB → PE Ratio = 10 times

) EPS Growth: Measure profit growth

EPS Growth = (###Current year’s EPS - Last year’s EPS() ÷ Last year’s EPS × 100%

This indicator shows how much EPS has grown. A positive value indicates increasing profit, while a negative indicates a decline.

Example: EPS in 2022 = 12 THB, EPS in 2021 = 8 THB → EPS Growth = ()12 - 8() ÷ 8 × 100% = 50%

) Dividend Payout Ratio: See how much profit is paid as dividends

Dividend Payout Ratio = Dividends per share ÷ EPS × 100%

This formula shows what proportion of profit is paid out as dividends. Investors seeking steady income often pay attention to this figure.

Example: Dividends per share 5 THB, EPS 10 THB → Dividend Payout Ratio = 50%

Differences between Basic EPS, Diluted EPS, and Adjusted EPS

When studying EPS data, you’ll find different types of EPS reported by companies. Let’s understand them.

Basic EPS: The standard EPS

Calculated simply by dividing net profit by total shares outstanding, without considering potential shares ###such as stock options or convertible bonds(.

) Diluted EPS: More “inclusive” EPS

If considering potential shares that could be issued ###such as stock options, convertible bonds(, the EPS will decrease because profits are divided among more shares. Diluted EPS is usually lower than Basic EPS.

) Adjusted EPS: The adjusted EPS

Financial data is adjusted by adding or subtracting special items to reflect the company’s normal profit. It excludes one-time items ###.

What makes a good EPS and its limitations

( What is a good EPS?

To be straightforward, a high EPS does not always mean a good company. The high figure could result from share buybacks )Stock Buyback###, which reduces shares outstanding but doesn’t increase real profit.

A good EPS should:

• Increase steadily over the long term, indicating strong growth
• Grow reasonably from increased sales and cost control

( Limitations of EPS to be aware of

1. Does not consider risk - A high EPS company may carry high risks.

2. Past data - EPS reflects historical data and may not predict future performance.

3. Ignores stock price - High EPS doesn’t mean the stock price is justified; check PE ratio.

4. Potential manipulation - EPS figures are reported by companies and may be adjusted to look better.

5. Should be compared with other metrics - Do not rely solely on EPS; include PE ratio, EPS growth, dividend payout ratio, etc.

How investors should use EPS for decision-making

Step 1: Compare EPS of the target company with peers in the same industry to see who performs better.

Step 2: Track whether EPS is increasing or decreasing over 3-5 years.

Step 3: Investigate the reasons behind EPS changes—are they normal or due to one-time events?

Step 4: Calculate PE ratio to see if the company’s profit relative to its stock price is reasonable.

Step 5: Assess EPS growth to determine if the company’s profit per share is expanding. Consistent positive EPS growth is a good sign.

Step 6: Use EPS as one of several indicators, not the sole basis. Combine with other data such as sales trends, financial strength, industry competition.

Summary: EPS is a tool that must be used wisely

EPS is a useful indicator for investment decisions, but it is not a guaranteed shortcut to success. Smart investors use EPS as part of a broader analysis, studying profit structure, business risks, comparing with competitors, and other financial metrics.

Most importantly, do not base decisions solely on EPS. Take time to study, observe trends, analyze carefully, and invest with caution. Patience and thoroughness will increase your chances of achieving good returns from stock market investments.