Stock investors need to know: What is EPS and why is it an important indicator

In the world of stock investing, understanding financial indicators is essential for making informed decisions. One of the most attention-grabbing metrics is EPS or Earnings Per Share, which indicates profit per share and helps investors assess a company’s performance.

What is EPS? Profit per Share in Simple Terms

EPS stands for Earnings Per Share, which in Thai is called “กำไรต่อหุ้น.” It is a financial ratio calculated by dividing the company’s net profit ( after deducting all expenses, including interest and taxes ), by the number of shares owned by shareholders currently.

Simply put, EPS shows how much profit each share of the company can generate. This indicator helps investors understand the profit potential of the company they are considering investing in.

How to Calculate EPS Correctly

The basic formula for calculating EPS is quite straightforward:

EPS = Net Profit ÷ Number of Outstanding Shares

However, in actual stock market practice, the formula used is:

EPS = Net Profit ÷ Average Number of Shares During the Year

Using the average number of shares makes sense because the number of shares often changes throughout the year, such as from issuing new shares or share buybacks.

Example Comparing EPS Calculations

To clarify, consider three companies:

• Company X: Net profit of 100 million baht, 10 million shares outstanding → EPS = 10 baht per share
• Company Y: Net profit of 100 million baht, 20 million shares outstanding → EPS = 5 baht per share
• Company Z: Net profit of 50 million baht, 5 million shares outstanding → EPS = 10 baht per share

From these examples, we see that even though Companies X and Y have the same profit, their EPS differs due to different share counts. Meanwhile, Companies X and Z have the same EPS despite different profits and share counts.

How Investors Use EPS to Make Investment Decisions

1. Comparing Company Performance Using EPS

The first step for investors is to study the EPS of the company they are interested in and compare it with:

• EPS of other companies in the same industry
• Past EPS of the same company to observe growth trends

This comparison helps identify which company is more efficient at generating profits.

2. Analyzing EPS Growth (The Growth Rate of Earnings Per Share)

EPS Growth measures the increase in EPS over a specified period:

EPS Growth = ((Current Year EPS - Previous Year EPS)) ÷ Previous Year EPS × 100%

Example: If a company’s EPS in 2023 is 12 baht and in 2022 is 8 baht, EPS Growth = (12 - 8) ÷ 8 × 100 = 50%

A positive EPS Growth indicates growth, which suggests the company’s future potential.

3. Calculating PE Ratio (Price-to-Earnings Ratio)

PE Ratio uses EPS to assess whether the stock price is reasonable:

PE Ratio = Current Stock Price ÷ EPS

Example: Stock price is 100 baht, EPS = 10 baht → PE Ratio = 10 times

A lower PE Ratio compared to a higher one indicates the stock may be undervalued, meaning less time is needed to recover the investment.

4. Evaluating Dividend Payout Ratio (Dividend Payout Ratio)

Companies with high EPS sometimes pay dividends to shareholders:

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

Example: Dividends per share are 3 baht, EPS = 10 baht → Dividend Payout Ratio = 30%

This shows the company pays out 30% of its profits as dividends, retaining 70% for reinvestment and growth.

Differences Between Basic EPS, Diluted EPS, and Adjusted EPS

Basic EPS (Basic Earnings Per Share)

Basic EPS is a straightforward calculation using net profit divided by the total number of common shares issued.

Diluted EPS (Diluted Earnings Per Share)

Diluted EPS accounts for potential shares from dilutive securities (such as stock options ) or convertible bonds (. This often results in a lower EPS because the denominator increases.

) Adjusted EPS ###Adjusted Earnings Per Share(

Adjusted EPS modifies the figure to exclude extraordinary items like gains from asset sales or one-time expenses, providing a clearer picture of the company’s normal operating performance.

Important Limitations of Using EPS

Although EPS is a useful indicator, it should not be the sole basis for investment decisions:

) 1. EPS Does Not Account for Risk

A high EPS company may have high debt levels or operate in risky industries.

2. EPS Can Increase Due to Share Buybacks, Not Actual Profit Growth

Companies may repurchase their own shares, reducing the number of shares outstanding and artificially boosting EPS without real profit increase.

3. EPS Reflects Past Data, Not Future Performance

EPS figures in financial reports are historical and do not guarantee future results.

4. Comparing EPS Is More Meaningful When Considering Trends and Other Metrics

Small increases in EPS (5-10%) over time can be significant, especially when viewed in context with other indicators.

What Makes a Good EPS?

A good EPS does not necessarily mean the highest value. Consider these factors:

• Consistent Growth in EPS: Companies with steady EPS growth over several years are generally more reliable.

• EPS Growth Outpacing Net Profit Growth: Indicates that increases in EPS are driven by actual profit growth, not just share buybacks.

• Reasonable PE Ratio: Lower than industry average but not abnormally low.

How to Find the EPS of a Stock You Are Interested In

If you prefer not to calculate manually, you can easily find EPS:

Through the Stock Exchange of Thailand (SET) website:

1. Visit the SET website
2. Enter the stock’s ticker symbol in the search box
3. On the stock detail page, scroll to the “Key Financials” section
4. The company’s EPS will be displayed there

Summary: Why Investors Need to Know About EPS

EPS is a key financial indicator that helps investors understand a company’s performance more clearly. Whether comparing PE Ratios, EPS Growth, or Dividend Payout Ratios, EPS serves as a fundamental reference.

However, relying solely on EPS is insufficient. Smart investors should analyze EPS alongside other metrics such as net profit, market value, debt levels, assets, and industry developments to make well-informed investment decisions with a solid foundation and reduced risk.