Earnings per Share

Something i have wanted to get more into is explaining the terms used in investing and how they can be used to analyze the value of a company.  First one i will get into is Earnings per Share which is one of the most important pieces of data about the stock and also the company itself.  A simple definition of this ratio is to show how much profit the company earns in the most recent 4 quarters for each individual share.

For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

Also another aspect of this is Projected Earnings per Share or Forward Earnings per Share, which is an estimate either done by the company itself or by 3rd party analysts.  This is far more important then regular Earnings per Share but it is not a fact like the former but a prediction, and a miss on the estimate of the company profits will have a drastic effect on the value of the stock.  One thing to take in mind when reading the company reports is the nature of how the company reports, some will be overly optimistic and set goals that are high but if missed can really damage a stock and others that are more conservative and will set lower goals but have a greater likelihood of meeting or exceeding these goals.