Why Traders Care about Earnings Per Share
Ultimately, the value of any company must come down to its potential return to shareholders in the form of profits or dividends. Earnings or profits are watched very closely for signs of strength or weakness. However, earnings can be diluted across a very large number of shareholders. So earnings are often broken out on a per-share basis so that investors and traders know how much of the firm’s profits are being allocated to their investment.
What is Earnings Per Share?
A company’s profits or earnings are divided by the total number of outstanding shares of stock to calculate the Earnings per Share (ttm). Earnings per Share is usually abbreviated as EPS and the “ttm” that follows stands for Trailing Twelve Months. This means that EPS (ttm) is the total earnings or profits the company has made over the last 12 months. That won’t necessarily coincide with the company’s fiscal year or the calendar year. For example, if you look at this number in July it will reflect the total earnings since July of the previous year.
Earnings are reported on a quarterly basis every three months and most companies will report after the end of the calendar-quarters in April, July, October and January. There are a few firms that report in between the calendar-quarters but they still do so in 3 month intervals. In the next image you can see where the EPS (ttm) for Lululemon Athletica (LULU) is located on the summary quote page.
Pull up the summary page for JCP and KBH and find the EPS (ttm) for both stocks. Was EPS for either of these companies negative? If not, see if you can come up with another stock or company that has been struggling or losing market share recently. Earnings can be negative if the company is losing money. Sometimes this is a temporary phenomenon but it can become a big issue of those losses continue to grow over time.
Besides looking for a positive EPS number investors need to understand whether the profits of a given company are good and growing or weakening. This is a challenging question but the answer can usually be found on the income statement. Earnings are also referred to as “net income” on the income statement, which you can find on the left-hand navigation menu under the “Financials” heading.
As you can see in the next image, LULU’s net income has been growing over the last three years. This is a good sign that the EPS number on the summary page reflects a company that is growing its profits over time. This won’t be a guarantee that the company will continue growing or that its stock price will rise but it does put the odds in favor of continued growth.
Find the Income Statement for IBM and evaluate whether Net Income has been growing over the last three years or not. What does that tell you about the EPS number on the summary page? Declining Net Income is often associated with a company that is losing market share and a stock that may be in decline. Select a few stocks on your own and compare the Net Income trends and stock price trends over the last three years. On average, these two trends should be fairly correlated.
EPS (ttm) is not a complete picture of a company’s financial performance but it can tell you at a glance whether the company is profitable or not. You can learn a lot more about whether a company’s earnings are growing by looking at the bottom line of the Income Statement. A stock’s price and its earnings growth should have a positive correlation on average, which makes EPS a great starting place for further research before you make an investment.