What is EPS?
EPS stands for Earnings Per Share = Earnings / Number of Shares. Theoretically, this ratio tells us that a company’s earnings could be distributed to each share. It’s one of the profitability indicators for measuring a company’s performance.
Of course, it also includes the effect of shares repurchase/issuance. For example, the company could issue more shares to collect cash from the public. The more shares that have been issued, the more earnings will be diluted in calculating the EPS (bigger denominator). But also we expect that higher EPS could be generated in the future since the company right now has more cash in hand and we are expecting that they could use the cash to reinvest in its business to generate more earnings.
One thing it should be aware of is the EPS should be used with other metrics. Sometimes, just because two companies have the same figure of EPS, doesn’t mean they have the same amount of equity of shares. One could have invested far less equity and generated higher earnings than another. So EPS is not a solely perfect metric to assess a company, we should use it in conjunction with other ratios/metrics to help us to generate high-quality trade ideas for both L/S sides.
