EPS Analysis - Earnings Per Share   Term Paper ID:45094 Click to get this paper

Essay Subject: Considers how EPS affects price and new ways in which EPS is calculated.... More...

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Paper Introduction: Earnings Per Share Analysis Introduction If all companies were privately held and operated without competition there would be little reason to be able to compare companies However companies operate in an environment of competition and some are publiclytraded and this means that a variety of stakeholders have an interest inbeing able to compare the performance of companies Shareholders areinterested in evaluating investment performance and opportunities Creditors and vendors want to ensure that potential customers are credit-worthy Job seekers and current employees are Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. When seeking to learn how one company is performing relative toanother, or even to itself over time, the performance of its earnings isoften taken into account. As its name implies, earnings per share takes the total amount of earningsand divides by the number of common shares outstanding. This means thatearnings fell 25 percent, and but price fell only 1 percent with theresult that the P/E ratio has actually risen to 12, meaning that the stockprice is not reflecting the fall in earnings. Owners and managers are interested in comparingtheir own organization's performance to that of the industry as a whole,and to specific competitors in particular. Earnings beforeincome and taxes (EBIT) is typically used to calculate EPS. Job seekers and current employees are interested in the long-termoutlook for organizations. Investopedia.com. At the end of 2 1 , earnings might havedeclined so that the EPS is now $3 and the price is $36. diluted earnings per share. A stock might finish 2 9 with an EPS of $4 and a price of$4 . If exercised, these would increase the number of sharesoutstanding which would lower the EPS. (n.d.). Preferredstock financing can result in a lower EPS since taxes are paid before thedividend, but the preferred dividend is paid before the final EPS iscalculated. This is where the earnings per share (EPS) measurement becomes useful. This iscalculated as the price per share divided by the earnings per share; thus acompany with a stock price of $4 and an EPS of $5 would have a P/E ratioof 8. To see how this might work, the following hypothetical scenario can beconsidered. Conclusion Earnings per share can be a valuable tool for investors and otherstakeholders to help evaluate a company's current position as well asdetermine its performance relative to other companies in the same orsimilar industries. Suite1 1.com. Accessed 1 Jan 2 1 : .Little, K. Forcompanies that are experiencing economic difficulties, these additional EPSmay indicate areas of strength where the company may have an advantage overits competitors, perhaps through a more sound investment strategy, forexample. Traditional EPS also needs to take into account the actual as well asthe potential number of shares outstanding. ReferencesEarnings per share estimates. EPS is used for more than just comparison of one company's earnings toanother, although that is certainly important. This EPS can also be calculatedand compared to other similar EPS calculations. Whether a company chooses to issue dividendsor reinvest some or all of its earnings is typically a strategic decisionthat is based in part on the type of company, the type of industry, theexpected economic environment, and other factors ("Earnings per shareestimates," 2 7). Accessed 1 Jan 2 1 : .Kennon, J. (2 7). EPS can have a direct relationship to the strategy that companies useto obtain new capital. EPS as calculated above usesthe number of outstanding shares, and that is by far the easiestcalculation. Earnings Per Share Analysis Introduction If all companies were privately held and operated without competition,there would be little reason to be able to compare companies. Accessed 1 Jan 2 1 : .Price-earnings ratio. Similarly, the company may have non-operating earnings, such asrenting out facilities to other companies. Generallyspeaking, companies whose stock is selling for less than their book valuerepresent much undervalued stocks since even liquidating the company wouldresult in more profit than the current price of the stock (Little, 2 1 ). (2 1 ). Comparing the EPS curves for different types of financing withdifferent financial scenarios can help companies determine the optimumcapital financing strategy (Guin, n.d.). Each of these has differenttax implications, and also different results on EPS. Increasingly, companies are alsousing EPS to calculate which capital budgeting strategies should be used inorder that the stock price remain as high as possible, and calculating EPSfor different financing scenarios can assist in this regard, as well.Stakeholders are also realizing the benefit of calculating different EPSfigures, such as investment EPS, in order to compare nontraditional EPSfigures. About.com. In what might seemcounter-intuitive, investors are also likely to sell stocks with high P/Eratios-not because they feel that the P/E ratio itself is high, but becausethe stock might be overvalued and thus there may be profits that can betaken while the price is high. Taking these shares into accountresults in the diluted EPS, and most companies express both in theirfinancial statements (Kennon, 2 1 ). Accessed 1 Jan 2 1 : . The P/E ratio provides an indication of how much investors arewilling to pay for each dollar of earnings ("Price-Earnings Ratio," 2 1 ). New Ways of Calculating EPS Increasingly, investors and others are calculating not just theoverall EPS, but they are also using EPS as a way of measuring how acompany is performing in certain areas. IfCompany A has only ten stockholders and Company B has 1 , there would befar less money to pay out in the form of dividends on a per-shareholderbasis. Basic vs. Shareholders areinterested in evaluating investment performance and opportunities.Creditors and vendors want to ensure that potential customers are credit-worthy. For example, a company may derivesome earnings from its investment activities; this can be compared to thecompany's investments over time, and to other companies in the sameindustry. Murray, KY: Murray State University. While useful, these EPS must also be used and considered within awider context, whether compared to other companies or to the company's ownperformance over time. However,companies operate in an environment of competition, and some are publiclytraded, and this means that a variety of stakeholders have an interest inbeing able to compare the performance of companies. (2 9, February 9). About.com. Consequences of the New Calculations Where traditional EPS takes into account the overall performance ofthe company across all of its activities, including operations-which shouldbe its core business-as well as investing and non-operating profits. Accessed 1 Jan 2 1 : .Guin, L. Like EPS itself, the P/E ratio for a particular company does notnecessarily provide much information in and of itself. Traditional earnings per share is also contrasted with the book valueper share of a company. If, however, other companiesin the industry have lower P/E ratios, or if there are factors that canexplain why the company's price would remain high-such as talk of takeover-then investors may not be overly concerned about the P/E ratio. Understanding book value. Price-Earnings per share ratio basics. EBIT/EPS analysis. The EPS of a company isalso a key component of the price-earnings ratio (P/E ratio). Instead, the P/Eratio is typically evaluated in comparison with other companies in the sameindustry, or with companies that have similar structures. It is an easy calculation to make, although the moredescriptive fully diluted earnings per share can require a closer readingof the company's financial statements. Inthe above example, Company A would have an EPS of $1 , while Company Bwould have an EPS of $2 ("Earnings Per Share Estimates," 2 7). This yields a P/E of 1 . As with traditional EPS, it is best to compare these new EPS inlike fashion in order to determine where a company stands with regard tothis measurement. Money-zine.com. Traditional Earnings Per Share Ostensibly, the earnings (profits) of a company can be redistributedto shareholders in the form of dividends, or reinvested in the company ascapital (retained earnings). However, it is not always useful to say thatCompany A had earnings of $1 while Company B had earnings of $2 . This indicates howmuch could be distributed to shareholders in the form of dividends, andprovides a more useful analytical tool than just the raw earnings data. The book value is the company's equity divided bythe number of shares; theoretically, this is the amount of money it wouldtake to purchase all outstanding shares of the company. Accessed 1 Jan 2 1 : .Hutchinson, J. When using EPSto consider different forms of financing, however, it is important to usealternative forms of EPS, or to calculate it on net profit, not EBIT, asshown in the following graph (Guin, n.d): [pic] Because interest payments on debt are deducted before taxes but afteroperating income, for example, EPS for debt financing that takes interestinto account may be higher than for common stock financing. Companies withhigh P/E ratios relative to their industry might be overpriced, whilecompanies with low P/E ratios relative to their competitors might representa good value for investors (Hutchinson, 2 9). (2 1 ). Companies can issue additional common stock,preferred stock, or use debt to raise capital. However, companies may have stock options or warrants thatare pending. EPS and Price EPS has an obvious and direct relationship with price in thatinvestors can evaluate the EPS and make decisions about buying or sellingthe stock that will ultimately affect price. If earnings are expected toremain flat over the next several years, investors may sell the stock inorder to invest in another with a lower P/E ratio. (2 1 . While there are manymeasurements that can be used to compare companies, one of the moststraightforward-and thus one of the most common-is earnings per share.This research considers the traditional definition and use of earnings pershare as well as new ways in which this metric is being calculated andused. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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