4 ms·

Just curious why does wall st and others use "Earnings per share". The number of shares is arbitrary and can be adjusted up or down by a split/reverse split or

Just curious why does wall st and others use "Earnings per share". The number of shares is arbitrary and can be adjusted up or down by a split/reverse split or dilution. It seems to me that EPS is just earnings divided by an arbitrary number. Why not look at operating profit as a percentage instead?

deleted 6y ago
[deleted]
_s 6y ago
https://en.m.wikipedia.org/wiki/Earnings_per_share https://en.m.wikipedia.org/wiki/Earnings_per_share
scoopdewoop 6y ago
dividends are what people historically bought stocks for, not speculation. If you want your stocks to pay dividends, earnings per share is a much more useful metric.
- lonelappde 6y ago
  I bought $10K of STOCK. I hope for 5% dividend. I have no idea how many shares that is, and I don't care.
  - yazaddaruvala 6y ago
    Then you want Earnings per Price. i.e. How much Earnings for STOCK*STOCK_PRICE. (Earning / Price) is not a typical metric, (Price / Earnings) (i.e. PE Ratio) is the more typical metric. These metrics are meant for casual/institutional investors not lay people[1]. Meanwhile, if you still want (Earning / Price), you can do (1 / PE Ratio). [1] If you aren't able to find the number of STOCK units you own or will purchase, then you are not a casual/institutional investor.
ars 6y ago
> The number of shares is arbitrary and can be adjusted up or down by a split/reverse split or dilution. The number of shares you own is not arbitrary - it's actually a very important number to you. So you multiply how many shares you own, with EPS, and you know your personal profit. In particular your profit per how much that share cost. Obviously investing in stocks has other ways that you can make money, but EPS is pretty core to the whole thing.
debian3 6y ago
Because you own a certain number of shares, so you can have a figure. If they split the EPS will change but the amount of share you own as well. If you want an overalls figure look at their financial statements.
mbreese 6y ago
You need to normalize against something when comparing the share price of one company vs. another company. EPS helps you determine the worth of any single share. Yes, if you're curious how well a particular company is doing over time, then it's arbitrary and not very helpful. But if you are comparing the relative value of a single share of company A vs company B, then it's helpful. (Which is then also related to the sibling comment about dividends).
antaviana 6y ago
It allows to sort of doing mentally the calculation of if the share price is 10x, 20x the EPS, as to quickly see it the share price is interesting for your perception of that company. That is it helped with a quickly triage for steals. Probably the EPS metric made more sense before Excel.
tathougies 6y ago
Because each share 'owns' that much earnings in the company, and revenue is one means by which a company is valued.
jedberg 6y ago
It's most interesting to investors because the entire value of the company is also divided by the arbitrary number of shares to get the share price, so it makes it easier to compare one stock to another by looking at the ratio of EPS and share price.
qroshan 6y ago
EPS is similar to 'Rent per Home'. Even though the # of houses in a city is arbitrary, when you buy a home, you want to know how much Rent Equivalent are you getting every month. Now, you can clearly price the house.
phonon 6y ago
Because a multiple for earnings per share gives you a rough idea of a fair share price. If earnings per share is $1, and the Share price is $5, that's fantastic. If the share price is $50, not good. You can track that multiple over time to know when to buy or sell a stock. Of course that's only a superficial analysis. You have to take into account the book value (asset value). If the company is high growth. What industry it's in. Whether a change in earning per share is due to a one-time event. Etc.

deleted 6y ago

[deleted]

_s 6y ago

https://en.m.wikipedia.org/wiki/Earnings_per_share https://en.m.wikipedia.org/wiki/Earnings_per_share

scoopdewoop 6y ago

dividends are what people historically bought stocks for, not speculation. If you want your stocks to pay dividends, earnings per share is a much more useful metric.

lonelappde 6y ago
I bought $10K of STOCK. I hope for 5% dividend. I have no idea how many shares that is, and I don't care.
- yazaddaruvala 6y ago
  Then you want Earnings per Price. i.e. How much Earnings for STOCK*STOCK_PRICE. (Earning / Price) is not a typical metric, (Price / Earnings) (i.e. PE Ratio) is the more typical metric. These metrics are meant for casual/institutional investors not lay people[1]. Meanwhile, if you still want (Earning / Price), you can do (1 / PE Ratio). [1] If you aren't able to find the number of STOCK units you own or will purchase, then you are not a casual/institutional investor.

ars 6y ago

> The number of shares is arbitrary and can be adjusted up or down by a split/reverse split or dilution. The number of shares you own is not arbitrary - it's actually a very important number to you. So you multiply how many shares you own, with EPS, and you know your personal profit. In particular your profit per how much that share cost. Obviously investing in stocks has other ways that you can make money, but EPS is pretty core to the whole thing.

debian3 6y ago

Because you own a certain number of shares, so you can have a figure. If they split the EPS will change but the amount of share you own as well. If you want an overalls figure look at their financial statements.

mbreese 6y ago

You need to normalize against something when comparing the share price of one company vs. another company. EPS helps you determine the worth of any single share. Yes, if you're curious how well a particular company is doing over time, then it's arbitrary and not very helpful. But if you are comparing the relative value of a single share of company A vs company B, then it's helpful. (Which is then also related to the sibling comment about dividends).

antaviana 6y ago

It allows to sort of doing mentally the calculation of if the share price is 10x, 20x the EPS, as to quickly see it the share price is interesting for your perception of that company. That is it helped with a quickly triage for steals. Probably the EPS metric made more sense before Excel.

tathougies 6y ago

Because each share 'owns' that much earnings in the company, and revenue is one means by which a company is valued.

jedberg 6y ago

It's most interesting to investors because the entire value of the company is also divided by the arbitrary number of shares to get the share price, so it makes it easier to compare one stock to another by looking at the ratio of EPS and share price.

qroshan 6y ago

EPS is similar to 'Rent per Home'. Even though the # of houses in a city is arbitrary, when you buy a home, you want to know how much Rent Equivalent are you getting every month. Now, you can clearly price the house.

phonon 6y ago

Because a multiple for earnings per share gives you a rough idea of a fair share price. If earnings per share is $1, and the Share price is $5, that's fantastic. If the share price is $50, not good. You can track that multiple over time to know when to buy or sell a stock. Of course that's only a superficial analysis. You have to take into account the book value (asset value). If the company is high growth. What industry it's in. Whether a change in earning per share is due to a one-time event. Etc.