EPS or Earnings Per Share helps investors understand the underlying value of their shares at a company level.
As a simple explanation, shareholders own part of the company, so the company’s net earnings are divided by the number of shares in existence which gives you the Earnings Per Share (EPS) or the value of each share at a company level - although the market can price these shares differently as buys and sells happen multiple times over the course of a day with varying levels of consumer confidence.
If the company makes a profit it’s earnings per share is higher, this works in reverse if it makes a loss.
There are two types of EPS, basic EPS (explained above) and diluted EPS (explained below).
What is diluted EPS?
Diluted EPS is the value of the earnings per share once new shares have been issued otherwise known as fully diluted shares.Fully diluted shares mean the number of shares increases and therefore reduces the dollars earned per share.
If you’ve owned shares before and have held them for long enough, you may have received a letter from the company offering you new shares at a discounted price. This is an example of how shares are diluted.
The company is issuing new shares to raise more money which dilutes the value of every existing shareholders shares. Diluted shares can also be a result of stock options, for example, issuing new shares to employees that get stocks as part of their remuneration or issuing new shares to institutional investors that have the option to purchase more shares over time, usually via a convertible note (kind of like layby, you get part of the shares now and you have the option to buy the rest later if you want them).
What is EPS without NRI (Non-Reoccurring Items)?
EPS without NRI (Non-Reoccurring Items) is a technical term and one way to assess if a company can effectively grow solely on its current user/client base without ‘new business’.
When assessing EPS without NRI, you divide the net re-occurring revenue the company receives by the number of shares available. You can do this calculation on consecutive years which will show you the growth rate of the company without obtaining new business. If a company can’t grow or sustain its revenue without ‘new business’, then investors need to be careful that the share price doesn’t decline when new business declines and in turn revenues begin to decline.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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