How to use the EPS formula correctly when trading

The result of the earnings per share formula, or EPS formula, aims to provide the investor or potential investor with information as to the profitability of a company for the financial period that they have just passed. Take a look at Stockstotrade.com!

The earnings per share formula can be a great calculation to consistently use when you are looking to trade stocks as it will provide you with key information on the profitability of the company that you are looking at investing In. This information can also include information on the financial past of the company, as well as the potential financial future of the company. The earnings per share value refers to how much profit the company in question has dedicated to each and every one of its outstanding shares that it has at for the financial period that is being examined. The EPS value of the company can be obtained dividing the net income of the company by the total number of outstanding shares that it has. If one would like to obtain what is known as a weighted EPS value, one that is more accurate, then one should first find the difference between the net dividends and net profits of the company for the financial period being examined, and then divide this difference by the total number of outstanding shares that the organisation has. This value is more accurate than unweighted, as it takes into consideration how much the number of shares outstanding that a company has could change throughout time.

So, how do you apply the earnings per share formula correctly when trading? Let’s say for example that a company makes a net income/profit of $10 million. Let’s also assume that the same company gives back $1 million to its shareholders. We also need to take into consideration the fact that this company has 4 million outstanding shares at the time of calculation. With these figures in mind, the earnings per share value would be calculated as follows:

$10,000,000 – $1,000,000 = $9,000,000

$9,000,000 / 4 million (shares outstanding) = $2.25

After this calculation has been executed, it is easy to see that the earnings per share value of this company evaluates to $2.25. In a real life trading scenario, this could be a very useful calculation to execute as it might just show you the differences that you were looking for when comparing two different organisations, when you are not sure of exactly where you would like to invest your money. Say for example the latter of the two companies that you were considering came out with the higher earnings per share value, it would be the more likely choice for selection for investment as the potential for a good return is technically speaking higher than that company with the lower EPS value of the two, since they are not as profitable.

Dependant on the period of time that you would like to work out the earnings per share of the company that you are looking at for – different types of the formula exist.

If you would like to work out the earnings per share value of the organisation for a period of time that was in the past – you should use the trailing EPS calculation. The trailing EPS refers to the earnings per share that was true for a period of time in the history of the company. This could be useful in that you may want to look at a certain event that took place within the company at a specific point in the past, and compare this against the earnings per share value of the company at that time in order for you to get an idea of how this event affected the profits of the company at that time. Should you decide that you would like to invest in the company and you know that a similar event is forecast to take place in the future, you will be able to make a reasonable prediction on how the profit of the company is going to be affected based on what you have learned from the trailing earnings per share value.

If you would like to know what the profitability of the company that you are looking at is for the current time, you should be sure that you use the current earnings per share formula. The current earnings per share formula take into consideration the profits for the company at the present time, and provides the earnings per share figure for the company based on these numbers. This is arguably the best calculation to execute if you are planning on making a slightly shorter term investment into the company, as the likelihood is that this number will not change all that considerably over the next couple of months. This means that you are able to predict where the company will be financially for the point that you are hoping to gain a return on your investment.

The forward earnings per share calculation is the one that you should execute should you be, for whatever reason, looking to gauge the profitability of the organisation for a period of time that is in the future. This can be a good calculation to make should you be considering making an investment that is for the longer term, as you will be able to see the chances of a return on your investment, if at all! It is important to remember however that, the further ahead in time that one goes, the less accurate the forward EPS value will become as it is a calculation that uses predictions, that are based off of previous and recent financial happenings in the organisation. The further away from these that one ventures, the more difficult it will be to make accurate predictions, as there will constantly be less and less factual information to base these predictions on.

When you are trading, should you decide to make use of the earnings per share formula, it is important to ensure that the calculation does not form the whole part of your decision for investing in a company, but instead helps you to make your decision!

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