Earnings Per Share (EPS) - Why Investors Need to Know and How to Use It

In the world of stock investing, the term EPS (Earnings Per Share) or earnings per share is often regarded as a magical phrase. However, many people still do not understand what it is and why it is important for investment decisions. This article will help you understand what is eps and how to use it practically that investors should know.

Why is EPS important? Before studying its calculation or application

Imagine you have 100,000 baht and want to buy shares of a certain company. The problem is, you cannot tell whether the company’s profit truly reflects its ability or if it’s just because the company has fewer shares.

This is where EPS or earnings per share comes in. It is a metric that tells you, “How much profit can the company generate for each share you hold.”

What is EPS? - A clear definition

EPS stands for Earnings Per Share, which refers to a financial ratio (Financial Ratio) that indicates the company’s net profit divided by the number of outstanding shares.

Basic formula: EPS = Net Profit (Net Profit) / Outstanding Shares (Outstanding Shares)

Here, net profit is the amount remaining after deducting expenses, interest, and income taxes.

How to practically calculate EPS

###Simple example: Comparing three companies

Company AA:

• Net profit: 1,000,000 Baht
• Shares outstanding: 1,000 shares
• EPS = 1,000,000 / 1,000 = 1,000 Baht/share

Company BB:

• Net profit: 1,000,000 Baht (Same as AA)
• Shares outstanding: 2,000 shares
• EPS = 1,000,000 / 2,000 = 500 Baht/share

Company CC:

• Net profit: 500,000 Baht
• Shares outstanding: 500 shares
• EPS = 500,000 / 500 = 1,000 Baht/share

From this example, what do you see?

AA and BB make the same profit, but AA has a higher EPS because it has fewer shares. CC makes less profit, but its EPS equals AA because it has even fewer shares.

###The actual market formula

However, the above simple formula often differs from the official published EPS because the real formula uses:

EPS = Net Profit / Average Outstanding Shares throughout the year

(Use the average because companies may issue or buy back shares during the year)

###Real-world example: PTT Company

• Net profit (Year 2022): 91,174.86 million Baht
• Average outstanding shares throughout the year: 28,562.9963909774 million shares
• EPS = 91,174.86 / 28,562.996… ≈ 3.19 Baht/share

###How to easily check EPS

You don’t need to calculate it yourself. You can visit the SET website (Stock Exchange of Thailand) by:

1. Going to www.set.or.th
2. Searching for the stock’s ticker symbol
3. Looking under “Key Performance” (Key Performance)
4. Find the “Earnings Per Share (EPS)” value

What can EPS be used for in analysis?

1. PE Ratio (Price-to-Earnings Ratio) - A valuation indicator

PE Ratio = Current Share Price / EPS

This indicator tells you “How many years it will take to recover your investment.” The lower the PE ratio, the better.

Example:

• Share price: 100 Baht
• EPS: 10 Baht
• PE Ratio = 100 / 10 = 10 times (It takes 10 years to break even)

Compare PE ratios with:

• The same company’s historical PE
• The industry average PE
• The overall market PE

2. EPS Growth - Growth rate

EPS Growth = (Current EPS - EPS of the previous year) / EPS of the previous year × 100%

This tells you whether the company is growing.

Example:

• EPS in 2022: 12 Baht
• EPS in 2021: 8 Baht
• EPS Growth = (12 - 8) / 8 × 100 = 50%

This company grew 50% last year, which is a good sign.

( 3. Dividend Payout Ratio - Dividend payout rate

Dividend Payout Ratio = Dividend per share / EPS × 100%

It shows how much profit the company distributes to shareholders.

Example:

• Dividend per share: 5 Baht
• EPS: 10 Baht
• Dividend Payout Ratio = 5 / 10 × 100 = 50%

This company distributes 50% of its profit to shareholders, retaining the other 50%.

How investors use EPS - 5 practical methods

( 1. Comparing companies within the same group

If you’re interested in two IT stocks, check their EPS:

• Company X: EPS = 5 Baht
• Company Y: EPS = 3 Baht

It might seem X is better, but you should also look at the share price and PE ratio.

) 2. Tracking growth trends

Look at EPS over 3-5 years:

• Gradually increasing = healthy company ✓
• Flat = investigate reasons
• Decreasing = be cautious ⚠

) 3. Investigate reasons for changes

If EPS increases, what caused it?

• Profit increased = good, the company is doing well (selling more products(
• Shares bought back = be cautious )may indicate overvaluation)

4. Using in ROI calculations (Return on Investment)

Besides EPS, you should also calculate:

• Return rate = (Dividend + Capital gains/losses) / Investment cost × 100%

Compare with other investment options ###bonds, funds, etc.###

5. Using EPS as part of decision-making

Important: EPS alone is not enough

It should be used together with:

• PE ratio
• Balance Sheet (Balance Sheet)
• Cash Flow (Cash Flow)
• Industry environment
• Management quality

Basic, Diluted, and Adjusted EPS - What’s the difference?

Basic EPS (Basic Earnings Per Share)

Uses the actual number of shares outstanding, no adjustments.

( Diluted EPS )Diluted Earnings Per Share(

Includes potential shares from future sources, such as:

• Stock options )Stock Options###
• Convertible bonds (Convertible Bonds)

This value is always lower than Basic EPS.

( Adjusted EPS )Adjusted Earnings Per Share###

Adjusted for clarity, such as:

• One-time expenses (One-time expenses)
• Recurring items ###Recurring items(

Suitable for viewing “normal” financial performance.

Warning: Investors should pay more attention to Diluted EPS, as it estimates the “worst-case” scenario.

Limitations of EPS - Be aware of pitfalls

Although EPS is a useful indicator, it has limitations:

) 1. Does not show risks

High EPS does not mean the stock has no risks. The company might have:

• High debt (Debt)
• Poor cash flow (Cash Flow)
• High business risk

2. Past data only

The EPS announced today is the profit of the previous year. It does not predict future EPS.

( 3. Does not reflect stock price

EPS does not indicate the “fair” stock price. Use PE ratio together.

) 4. May be “manipulated”

Companies might use accounting tricks to inflate EPS.

( 5. Need to compare with other metrics

Looking at EPS alone often provides incomplete information. It should be compared with:

• Other companies in the industry
• The company’s own historical data over multiple years
• Other financial indicators

What does a “good” EPS look like?

)Common misconceptions

Many think that high EPS = good stock

This is not always correct

(In reality

A good EPS depends on:

1. The company is growing

• EPS increases year over year consistently
• EPS Growth of 5-15% annually

2. Reasonable PE ratio

• PE ratio lower than the market average
• PE ratio aligns with growth rate

3. Growth in EPS comes from genuine profit

• Not from stock buybacks )Stock Buyback###
• Not from accounting gimmicks

4. Consistency

• Not fluctuating wildly
• Clear trend

(Good numerical examples

For companies in various industries, standard good EPS varies:

• Growth-oriented companies: EPS Growth > 20%
• Stable/dividend-focused companies: Consistent EPS, Dividend Payout 50-70%
• Young companies: EPS may be negative but revenue is growing

Summary - Know EPS but remember other factors

EPS is a measure of a company’s profit per share. It is a smart tool for investors who want to:

• Compare companies
• Track growth
• Assess valuation

But EPS is not everything. You should view it as an estimate:

✓ Risks )Risk( ✓ Cash Flow )Cash Flow### ✓ Balance Sheet ###Balance Sheet### ✓ Industry ###Industry### ✓ Management ###Management( ✓ Business Cycle )Business Cycle###

Smart investors use EPS as one part of their decision-making process, not relying solely on a single number and overlooking the bigger picture of investment.