Earnings Per Share Analysis: How to Calculate and Interpret EPS as a Measure of Profitability and Value

1. What is Earnings Per Share (EPS) and Why is it Important?

Earnings Per Share (EPS) is a crucial financial metric used to assess a company's profitability and value. It measures the portion of a company's profit allocated to each outstanding share of common stock. EPS is important because it provides insights into a company's ability to generate earnings for its shareholders.

From an investor's perspective, EPS helps in evaluating the profitability of a company and comparing it with other companies in the same industry. A higher EPS indicates higher profitability, which can attract potential investors. On the other hand, a lower EPS may raise concerns about the company's financial performance.

There are different perspectives to consider when analyzing EPS. Let's explore them:

1. Basic EPS: This is the most commonly used EPS calculation, which divides the net income available to common shareholders by the weighted average number of outstanding shares. It provides a straightforward measure of a company's profitability.

2. Diluted EPS: Diluted EPS takes into account the potential dilution of outstanding shares from convertible securities, such as stock options or convertible bonds. It provides a more conservative measure of EPS by assuming the conversion of these securities into common shares.

3. Historical EPS: Historical EPS tracks the trend of a company's earnings over time. It helps in identifying patterns and assessing the company's historical performance. Investors often look for consistent growth or stability in EPS over multiple periods.

4. Forward EPS: Forward EPS estimates the future earnings of a company based on analysts' forecasts. It provides insights into the market's expectations and can influence investment decisions. Comparing the forward EPS with the historical EPS can indicate whether the company is expected to grow or face challenges.

5. Sector Comparison: EPS is most valuable when compared to other companies within the same industry or sector. It helps in understanding how a company performs relative to its peers. Investors often look for companies with higher EPS compared to their competitors.

To illustrate the concept, let's consider a hypothetical example. Company XYZ reported a net income of $10 million and has 5 million outstanding shares. The basic EPS would be $2 ($10 million divided by 5 million shares). This indicates that each share of Company XYZ represents $2 of earnings.

Earnings Per Share (EPS) is a fundamental metric that provides insights into a company's profitability and value. By analyzing EPS from different perspectives and comparing it to industry benchmarks, investors can make informed decisions about investing in a company.

2. How to Calculate EPS from Net Income and Shares Outstanding?

Earnings per Share (EPS) is a crucial financial metric used to assess a company's profitability and value. It provides valuable insights into the company's ability to generate earnings for its shareholders. In this section, we will delve into the basic EPS formula and explore how to calculate EPS using net income and shares outstanding.

1. Understanding the Basic EPS Formula:

EPS is calculated by dividing the net income of a company by its shares outstanding. The formula for calculating EPS is as follows:

EPS = Net Income / Shares Outstanding

Net income represents the company's total earnings after deducting all expenses, taxes, and interest. Shares outstanding refer to the total number of shares issued by the company and held by its shareholders.

2. Analyzing EPS from Different Perspectives:

EPS can be analyzed from various perspectives to gain a comprehensive understanding of a company's financial performance. Let's explore some key insights:

A. Historical EPS Analysis:

By comparing EPS figures over multiple periods, investors can assess the company's earnings growth or decline. Increasing EPS indicates positive growth, while decreasing EPS may raise concerns about profitability.

B. Industry and Sector Comparison:

Comparing a company's EPS with its industry peers or sector average helps evaluate its relative performance. A higher EPS than competitors suggests better profitability, while a lower EPS may indicate underperformance.

C. EPS and Dividends:

EPS is closely linked to dividend payments. Companies with higher EPS often have the potential to distribute more dividends to shareholders. Investors seeking income may consider companies with a consistent track record of increasing EPS and dividend payouts.

3. Calculating EPS with Examples:

Let's consider an example to illustrate the EPS calculation:

Company XYZ reported a net income of $1,000,000 for the fiscal year. The company has 1,000,000 shares outstanding. To calculate EPS, we divide the net income by the shares outstanding:

EPS = $1,000,000 / 1,000,000 = $1.00

In this example, Company XYZ has an EPS of $1.00 per share.

By understanding the basic EPS formula and analyzing EPS from different perspectives, investors can gain valuable insights into a company's profitability and make informed investment decisions.

3. How to Adjust EPS for Potential Dilution from Stock Options, Convertible Bonds, and Warrants?

One of the most important metrics that investors use to evaluate a company's performance and value is earnings per share (EPS). EPS measures how much profit a company generates for each share of its common stock. However, EPS can be misleading if it does not account for the potential dilution that may occur when a company issues additional shares of stock to its employees, bondholders, or warrant holders. Dilution reduces the EPS by increasing the number of shares outstanding, which lowers the earnings per share. Therefore, it is essential to adjust the EPS for potential dilution from stock options, convertible bonds, and warrants. This adjusted EPS is called diluted EPS, and it represents the worst-case scenario for the existing shareholders.

To calculate the diluted EPS, we need to follow these steps:

1. Identify the potential sources of dilution from the company's financial statements. These may include stock options, restricted stock units, convertible bonds, convertible preferred stock, warrants, and other securities that can be converted into common stock.

2. Calculate the number of additional shares that would be issued if all the dilutive securities were exercised or converted. This is called the incremental shares. For stock options and warrants, we use the treasury stock method, which assumes that the company will use the proceeds from exercising the options or warrants to buy back some of the shares at the average market price. For convertible bonds and preferred stock, we use the if-converted method, which assumes that the bonds or preferred stock are converted into common stock at the conversion ratio.

3. Add the incremental shares to the weighted average number of shares outstanding (WASO) to get the diluted WASO. This is the denominator of the diluted EPS formula.

4. Adjust the net income for the after-tax effect of the dilutive securities. For convertible bonds, we need to add back the interest expense (net of tax) that would be saved if the bonds were converted. For convertible preferred stock, we need to subtract the preferred dividends that would be saved if the preferred stock were converted. For stock options and warrants, there is no adjustment needed for net income. This is the numerator of the diluted EPS formula.

5. Divide the adjusted net income by the diluted WASO to get the diluted EPS.

Let's look at an example to illustrate the diluted EPS formula. Suppose Company A has the following information for the year 2023:

- Net income: $100 million

- Weighted average number of shares outstanding: 50 million

- Stock options: 10 million options with an exercise price of $10 per share. The average market price of the stock for the year was $15 per share.

- Convertible bonds: $200 million of 5% bonds that can be converted into 20 million shares of common stock. The tax rate is 30%.

- Convertible preferred stock: 5 million shares of preferred stock that pay $1 per share in dividends and can be converted into 10 million shares of common stock.

To calculate the diluted EPS, we need to do the following:

1. Identify the potential sources of dilution: stock options, convertible bonds, and convertible preferred stock.

2. Calculate the incremental shares:

- For stock options, we use the treasury stock method. The number of shares that would be issued if the options were exercised is 10 million. The number of shares that would be bought back with the proceeds is 10 million x $10 / $15 = 6.67 million. The incremental shares from stock options are 10 million - 6.67 million = 3.33 million.

- For convertible bonds, we use the if-converted method. The number of shares that would be issued if the bonds were converted is 20 million. The incremental shares from convertible bonds are 20 million.

- For convertible preferred stock, we use the if-converted method. The number of shares that would be issued if the preferred stock were converted is 10 million. The incremental shares from convertible preferred stock are 10 million.

- The total incremental shares are 3.33 million + 20 million + 10 million = 33.33 million.

3. Add the incremental shares to the WASO to get the diluted WASO: 50 million + 33.33 million = 83.33 million.

4. Adjust the net income for the after-tax effect of the dilutive securities:

- For convertible bonds, we need to add back the interest expense (net of tax) that would be saved if the bonds were converted. The interest expense is 5% x $200 million = $10 million. The after-tax interest expense is $10 million x (1 - 0.3) = $7 million. The adjusted net income from convertible bonds is $100 million + $7 million = $107 million.

- For convertible preferred stock, we need to subtract the preferred dividends that would be saved if the preferred stock were converted. The preferred dividends are 5 million x $1 = $5 million. The adjusted net income from convertible preferred stock is $107 million - $5 million = $102 million.

- For stock options, there is no adjustment needed for net income. The adjusted net income from stock options is $102 million.

- The total adjusted net income is $102 million.

5. Divide the adjusted net income by the diluted WASO to get the diluted EPS: $102 million / 83.33 million = $1.22 per share.

The diluted eps of Company A is $1.22 per share, which is lower than the basic EPS of $100 million / 50 million = $2 per share. This means that the company has a high potential for dilution, and the existing shareholders would see their earnings per share decrease if all the dilutive securities were exercised or converted. Therefore, investors should always compare the diluted EPS with the basic EPS to get a more realistic picture of the company's profitability and value.

4. How to Measure the Change in EPS over Time and Compare it with Industry Peers?

EPS Growth rate is a crucial metric used to assess the change in Earnings Per Share over time and compare it with industry peers. In this section, we will delve into the significance of EPS growth Rate and its implications for profitability and value.

Understanding EPS Growth Rate requires considering various perspectives. From an investor's point of view, a consistently increasing EPS indicates a company's ability to generate higher profits and potentially attract more investors. On the other hand, a declining EPS Growth Rate may raise concerns about the company's financial health and future prospects.

To provide a comprehensive understanding, let's explore the key aspects of measuring EPS Growth Rate:

1. Calculation: EPS Growth Rate is calculated by comparing the EPS of a company over a specific period, usually on an annual basis. The formula is as follows:

EPS Growth Rate = ((Current EPS - Previous EPS) / Previous EPS) * 100

2. Industry Comparison: Comparing a company's EPS growth Rate with its industry peers helps assess its performance relative to the sector. A higher EPS growth Rate than the industry average indicates a potentially stronger position, while a lower rate may suggest underperformance.

3. Long-Term vs. short-Term growth: It's essential to analyze EPS Growth Rate over multiple periods to identify trends. Short-term fluctuations may not provide a comprehensive picture of a company's growth trajectory. long-term growth trends can reveal the company's ability to sustain and improve its profitability.

4. Factors Influencing EPS Growth: Several factors can impact a company's EPS Growth Rate. These include revenue growth, cost management, operational efficiency, market conditions, industry dynamics, and strategic initiatives. Analyzing these factors can help identify the drivers behind the EPS growth or decline.

5. Examples: Let's consider a hypothetical example to illustrate the concept. Suppose Company A had an EPS of $2.00 in the previous year and $2.50 in the current year. Using the formula mentioned earlier, we can calculate the EPS Growth Rate as ((2.50 - 2.00) / 2.00) * 100 = 25%. This indicates a 25% growth in EPS for Company A.

By understanding EPS Growth Rate and its measurement, investors and analysts can gain insights into a company's financial performance, profitability, and value. It serves as a valuable tool for decision-making and comparing companies within an industry.

5. How to Evaluate the Sustainability and Reliability of EPS and Avoid Accounting Manipulation?

Earnings per share (EPS) is one of the most widely used metrics to evaluate a company's profitability and value. However, not all EPS are created equal. Some companies may report high EPS by using accounting tricks or one-time gains that are not sustainable or reliable. Therefore, investors need to look beyond the headline EPS number and assess the quality of EPS to determine whether it reflects the true earning power of the company and its future prospects. In this section, we will discuss how to evaluate the sustainability and reliability of EPS and avoid accounting manipulation. We will cover the following topics:

1. The difference between reported EPS and adjusted EPS. Reported EPS is the EPS that a company reports according to the generally accepted accounting principles (GAAP). Adjusted EPS is the EPS that a company reports after excluding certain items that are considered non-recurring, non-operating, or non-cash. These items may include restructuring charges, impairment losses, legal settlements, gains or losses from asset sales, stock-based compensation, amortization of intangible assets, and tax effects. Adjusted EPS is supposed to provide a clearer picture of the company's core operating performance and exclude the noise from one-time or non-cash items. However, there is no standard definition of adjusted EPS and different companies may use different methods to calculate it. Therefore, investors should be careful when comparing the adjusted EPS of different companies and understand the assumptions and adjustments behind them. For example, some companies may exclude stock-based compensation from their adjusted EPS, while others may not. Stock-based compensation is a real expense that dilutes the existing shareholders and reduces the company's cash flow. Therefore, excluding it from the adjusted EPS may overstate the company's profitability and value.

2. The difference between basic eps and diluted EPS. Basic EPS is the EPS that a company reports by dividing its net income by the weighted average number of common shares outstanding during the period. Diluted EPS is the EPS that a company reports by dividing its net income by the weighted average number of common shares outstanding plus the potential dilutive effect of other securities that can be converted into common shares, such as stock options, warrants, convertible bonds, and preferred shares. Diluted EPS reflects the worst-case scenario of the EPS that a company can report if all the dilutive securities are exercised or converted. Therefore, diluted EPS is more conservative and realistic than basic EPS and investors should use it to value a company. However, some companies may report a low diluted EPS by using the treasury stock method or the if-converted method to calculate the dilutive effect of their securities. The treasury stock method assumes that the company uses the proceeds from exercising the options or warrants to buy back its own shares at the average market price, thus reducing the number of shares outstanding. The if-converted method assumes that the convertible bonds or preferred shares are converted into common shares only if the conversion is beneficial for the company, thus ignoring the interest or dividend payments that the company has to make. These methods may understate the dilutive effect of the securities and overstate the diluted EPS of the company. Therefore, investors should be aware of the methods that a company uses to calculate its diluted EPS and adjust them accordingly.

3. The difference between EPS growth and earnings growth. EPS growth is the percentage change in the EPS of a company from one period to another. Earnings growth is the percentage change in the net income of a company from one period to another. EPS growth and earnings growth are not always the same, because EPS growth can be affected by changes in the number of shares outstanding, while earnings growth is not. A company can increase its EPS growth by reducing its number of shares outstanding through share buybacks, stock splits, or reverse stock splits. Share buybacks are when a company uses its cash to repurchase its own shares from the market, thus reducing the supply of shares and increasing the demand. Stock splits are when a company increases its number of shares outstanding by issuing more shares to the existing shareholders, thus reducing the price per share and making it more affordable for investors. Reverse stock splits are when a company decreases its number of shares outstanding by exchanging a certain number of shares for a smaller number of new shares, thus increasing the price per share and making it more attractive for investors. However, these actions do not change the net income or the value of the company, they only change the EPS and the share price. Therefore, investors should not be misled by the EPS growth of a company and look at the earnings growth as well. A company that has a high EPS growth but a low earnings growth may be using share manipulation to boost its EPS and hide its weak performance. A company that has a low EPS growth but a high earnings growth may be investing in its future growth and creating value for its shareholders.

6. How to Use EPS to Value a Stock and Assess its Relative Cheapness or Expensiveness?

One of the most common ways to use EPS to value a stock is to calculate its price-to-earnings ratio (P/E). The P/E ratio is the ratio of the stock price to the EPS, and it indicates how much investors are willing to pay for each dollar of earnings. The P/E ratio can be used to compare the relative value of different stocks, or to assess whether a stock is overvalued or undervalued. However, the P/E ratio is not a perfect measure of value, and it has some limitations and drawbacks. In this section, we will discuss how to use the P/E ratio, what factors affect it, and what are some of the advantages and disadvantages of using it.

Here are some points to consider when using the P/E ratio:

1. The P/E ratio can vary widely depending on the industry, the growth prospects, the risk profile, and the earnings quality of the company. Therefore, it is important to compare the P/E ratio of a stock with its peers in the same industry, or with the industry average, rather than with the market average. For example, a high-tech company with high growth potential may have a higher P/E ratio than a utility company with stable earnings, even if they have the same EPS. This is because investors expect the high-tech company to grow faster and generate more future earnings, and are willing to pay a premium for it.

2. The P/E ratio can also change over time due to changes in the stock price, the EPS, or both. A rising P/E ratio may indicate that the stock price is increasing faster than the EPS, which could mean that the stock is becoming more expensive or overvalued. A falling P/E ratio may indicate that the stock price is decreasing faster than the EPS, which could mean that the stock is becoming cheaper or undervalued. However, a change in the P/E ratio may also reflect a change in the expectations or sentiments of the market, rather than a change in the intrinsic value of the company. For example, a low P/E ratio may not necessarily mean that the stock is a bargain, but rather that the market is pessimistic about the company's future prospects, or that the company has low earnings quality or high risk.

3. The P/E ratio is based on the eps, which is a backward-looking measure of profitability. The EPS reflects the past performance of the company, but it may not be indicative of the future performance. The EPS can also be manipulated or distorted by accounting practices, such as earnings management, depreciation methods, amortization, stock buybacks, or one-time items. Therefore, it is important to look at the quality and sustainability of the earnings, and to adjust the EPS for any non-recurring or non-operating factors, before using it to calculate the P/E ratio. Alternatively, some investors prefer to use the forward P/E ratio, which is based on the expected or projected EPS for the next year or the next 12 months, rather than the trailing P/E ratio, which is based on the actual EPS for the past year or the past 12 months. The forward P/E ratio may provide a more accurate and realistic picture of the company's value, but it also depends on the accuracy and reliability of the earnings forecasts, which can be subject to errors or biases.

4. The P/E ratio is a simple and widely used measure of value, but it is not the only one. There are other valuation metrics that can complement or supplement the P/E ratio, such as the price-to-book ratio (P/B), the price-to-sales ratio (P/S), the price-to-cash-flow ratio (P/CF), the price-to-earnings-growth ratio (PEG), the dividend yield, or the discounted cash flow (DCF) model. Each of these metrics has its own strengths and weaknesses, and they may provide different perspectives or insights on the value of a stock. Therefore, it is advisable to use a combination of different valuation methods, rather than relying solely on the P/E ratio, to get a more comprehensive and balanced view of the value of a stock.

To illustrate how to use the P/E ratio, let us look at an example. Suppose we want to compare the value of two stocks, A and B, in the same industry. Stock A has a price of $50 and an EPS of $5, while stock B has a price of $40 and an EPS of $4. The P/E ratio of stock A is $50/$5 = 10, while the P/E ratio of stock B is $40/$4 = 10. Based on the P/E ratio alone, we may conclude that both stocks are equally valued, and that neither of them is cheap or expensive. However, if we dig deeper, we may find that stock A has a higher growth rate, a lower risk, and a higher earnings quality than stock B, which may justify its higher price. Alternatively, we may find that stock B has a lower P/E ratio than the industry average, while stock A has a higher P/E ratio than the industry average, which may suggest that stock B is undervalued and stock A is overvalued. Therefore, we need to consider other factors and metrics, besides the P/E ratio, to make a more informed and rational decision.

7. How to Use EPS to Estimate the Return on Investment (ROI) from Buying a Stock?

Earnings yield is a financial metric used to estimate the return on investment (ROI) from buying a stock. It is calculated by dividing the earnings per share (EPS) by the current market price per share. EPS, on the other hand, is a measure of a company's profitability and value, calculated by dividing the net earnings of a company by the number of outstanding shares.

When analyzing earnings yield, it's important to consider different perspectives. Some investors view a higher earnings yield as an indication of a potentially undervalued stock, while others may interpret it as a sign of higher risk or lower growth prospects.

To provide a more in-depth understanding, let's explore some key points about earnings yield:

1. Relationship with EPS: Earnings yield is directly related to EPS. As EPS increases, assuming the market price per share remains constant, the earnings yield will also increase. This suggests that the stock may offer a higher return relative to its price.

2. Comparing Earnings Yield: Investors often compare the earnings yield of different stocks within the same industry or sector. This allows them to assess which stocks may offer a relatively higher return on investment.

3. Importance of market price: The market price per share plays a crucial role in calculating earnings yield. A higher market price will result in a lower earnings yield, while a lower market price will lead to a higher earnings yield.

4. Limitations of Earnings Yield: It's essential to consider the limitations of earnings yield. It does not take into account factors such as future growth prospects, industry dynamics, or market conditions. Therefore, it should be used in conjunction with other financial metrics and thorough analysis.

Please note that the examples provided here are for illustrative purposes only and may not reflect actual market conditions or specific stocks. It's always recommended to conduct thorough research and consult with a financial advisor before making any investment decisions.

8. How to Compare the Two Common Ways of Distributing Profits to Shareholders?

Earnings Per Share (EPS) and Dividends Per Share (DPS) are two common ways of distributing profits to shareholders. In this section, we will explore the differences between these two measures and how they can be compared.

1. understanding Earnings Per share (EPS):

EPS is a financial metric that indicates the profitability of a company on a per-share basis. It is calculated by dividing the net earnings of a company by the total number of outstanding shares. EPS provides insights into the company's ability to generate profits and is often used by investors to assess its financial performance.

2. Exploring Dividends Per Share (DPS):

DPS, on the other hand, represents the portion of a company's earnings that is distributed to shareholders in the form of dividends. It is calculated by dividing the total dividends paid by the number of outstanding shares. DPS is an important measure for income-seeking investors who rely on dividends as a source of regular income.

3. Comparing EPS and DPS:

While EPS focuses on the overall profitability of a company, DPS specifically looks at the portion of earnings distributed to shareholders. These measures serve different purposes and provide different insights into a company's financial health.

4. Importance of EPS:

EPS is often used by investors to assess the profitability and growth potential of a company. A higher EPS indicates that the company is generating more profits per share, which can be seen as a positive sign. However, it's important to consider other factors such as revenue growth, industry trends, and market conditions when interpreting EPS.

5. Importance of DPS:

DPS is crucial for investors who rely on dividends as a source of income. A consistent and growing DPS can indicate a company's commitment to returning profits to shareholders. However, it's important to note that not all companies pay dividends, especially those in the growth phase that reinvest earnings back into the business.

6. Examples:

Let's consider two hypothetical companies, Company A and Company B. Company A has a higher EPS compared to Company B, indicating better profitability. However, Company B pays a higher DPS, making it more attractive to income-seeking investors. This example highlights the importance of considering both EPS and DPS in investment decision-making.

EPS and DPS are two important measures that provide insights into a company's profitability and its distribution of profits to shareholders. While EPS focuses on overall profitability, DPS specifically looks at dividends paid to shareholders. Both measures have their significance depending on the investment goals and preferences of investors.

9. How to Use EPS Analysis to Make Better Investment Decisions and Identify Profitable and Valuable Stocks?

You have reached the end of this blog on earnings Per Share analysis. In this section, we will summarize the main points and provide some practical tips on how to use EPS analysis to make better investment decisions and identify profitable and valuable stocks. eps is a measure of how much profit a company generates for each share of its stock. It is calculated by dividing the net income by the number of outstanding shares. EPS can be used to compare the profitability and value of different companies in the same industry or sector. However, EPS alone is not enough to evaluate a stock's performance. You also need to consider other factors such as growth, dividends, cash flow, and valuation ratios. Here are some steps you can follow to use EPS analysis effectively:

1. Find the EPS of the company you are interested in. You can use financial websites, annual reports, or earnings releases to find the EPS of a company. You can also calculate it yourself by using the net income and the number of outstanding shares. Make sure you use the diluted EPS, which accounts for the potential increase in shares due to options, warrants, or convertible securities.

2. Compare the EPS with the industry average and the competitors. You can use industry reports, analyst ratings, or online tools to find the average EPS of the industry or sector you are looking at. You can also compare the EPS of the company with its direct competitors to see how it stacks up against them. A higher EPS than the industry average or the competitors indicates that the company is more profitable and efficient than its peers.

3. Look at the EPS growth rate and the earnings quality. You can use historical data, earnings forecasts, or growth models to estimate the EPS growth rate of the company. A positive and consistent EPS growth rate indicates that the company is able to increase its earnings over time and has a sustainable competitive advantage. You should also look at the earnings quality, which refers to how reliable and accurate the EPS is. You can use accounting ratios, audit reports, or earnings surprises to assess the earnings quality. A high earnings quality means that the EPS is not manipulated or distorted by accounting tricks or one-time events.

4. Consider the dividend policy and the payout ratio. You can use dividend history, dividend yield, or dividend announcements to find out the dividend policy and the payout ratio of the company. The dividend policy is the strategy that the company uses to distribute its earnings to its shareholders. The payout ratio is the percentage of the earnings that the company pays out as dividends. A high dividend policy and a low payout ratio indicate that the company is confident in its future earnings and has enough cash to reinvest in its business and reward its shareholders.

5. Evaluate the valuation ratios and the intrinsic value. You can use price-to-earnings (P/E), price-to-earnings growth (PEG), or price-to-book (P/B) ratios to measure the valuation of the company. These ratios compare the market price of the stock with the earnings, the earnings growth, or the book value of the company. A low valuation ratio means that the stock is undervalued and has a higher potential for appreciation. You can also use discounted cash flow (DCF), dividend discount model (DDM), or residual income model (RIM) to estimate the intrinsic value of the stock. The intrinsic value is the true worth of the stock based on its future cash flows or earnings. A stock is considered to be a good investment if its intrinsic value is higher than its market price.

For example, let's say you are interested in investing in Apple Inc. (AAPL), a technology company that produces and sells various devices, software, and services. You can use the following steps to use EPS analysis to evaluate its stock:

1. Find the EPS of Apple. According to its latest quarterly report, Apple had a net income of $28.76 billion and a diluted EPS of $1.68 for the quarter ended December 26, 2020. You can also use the trailing twelve months (TTM) EPS, which is the sum of the EPS for the last four quarters. For Apple, the TTM EPS was $3.28 as of December 26, 2020.

2. Compare the EPS with the industry average and the competitors. According to Yahoo Finance, the average EPS of the technology sector was $1.22 and the average EPS of the computer hardware industry was $1.65 as of February 1, 2021. You can also compare Apple's EPS with its main competitors, such as Microsoft (MSFT), Samsung (SSNLF), and Google (GOOG). As of February 1, 2021, Microsoft had a TTM EPS of $6.20, Samsung had a TTM EPS of $2.69, and Google had a TTM EPS of $46.60. You can see that Apple's EPS is higher than the industry average and most of its competitors, except for Google, which has a much higher EPS due to its diversified and profitable business segments.

3. Look at the EPS growth rate and the earnings quality. According to Yahoo Finance, Apple's EPS growth rate for the past five years was 13.16%, which is higher than the industry average of 10.68% and the sector average of 9.64%. Apple's EPS growth rate for the next five years is projected to be 12.33%, which is also higher than the industry average of 11.63% and the sector average of 10.82%. You can see that Apple has a positive and consistent EPS growth rate, which indicates that it is able to increase its earnings over time and has a strong competitive advantage in the technology market. You can also look at Apple's earnings quality, which is high according to various measures. For instance, Apple's return on equity (ROE) was 82.88%, which is much higher than the industry average of 19.79% and the sector average of 17.67%. Apple's earnings surprise was 19.65%, which means that it beat the analysts' expectations by 19.65% in the last quarter. Apple's earnings quality is also reflected in its high customer satisfaction, brand loyalty, and innovation.

4. Consider the dividend policy and the payout ratio. According to Yahoo Finance, Apple's dividend policy is to pay a quarterly dividend to its shareholders. Apple's dividend yield was 0.61%, which is lower than the industry average of 1.01% and the sector average of 1.18%. Apple's payout ratio was 23.78%, which is lower than the industry average of 36.15% and the sector average of 38.87%. You can see that Apple has a low dividend policy and a low payout ratio, which indicate that it is confident in its future earnings and has enough cash to reinvest in its business and reward its shareholders. Apple's dividend policy is also consistent with its growth strategy, as it prefers to use its cash to fund its research and development, acquisitions, and share buybacks.

5. Evaluate the valuation ratios and the intrinsic value. According to Yahoo Finance, Apple's P/E ratio was 40.32, which is higher than the industry average of 28.97 and the sector average of 27.62. Apple's PEG ratio was 3.28, which is higher than the industry average of 2.48 and the sector average of 2.53. Apple's P/B ratio was 34.16, which is higher than the industry average of 6.64 and the sector average of 5.84. You can see that Apple's valuation ratios are high, which means that the stock is overvalued and has a lower potential for appreciation. However, you can also use other methods to estimate the intrinsic value of the stock, such as the DCF, DDM, or RIM. For example, using the DCF method with a discount rate of 10% and a terminal growth rate of 3%, you can calculate the intrinsic value of Apple's stock to be $149.72, which is higher than its market price of $134.14 as of February 1, 2021. This means that the stock is undervalued and has a higher potential for appreciation.

Based on the EPS analysis, you can conclude that Apple is a profitable and valuable company that has a strong competitive advantage, a high earnings quality, a confident dividend policy, and a consistent EPS growth rate. However, you also need to consider the valuation of the stock, which is high according to the valuation ratios, but low according to the intrinsic value methods. Therefore, you need to use your own judgment and risk tolerance to decide whether to invest in Apple's stock or not. You should also diversify your portfolio and monitor the market conditions and the company's performance regularly. EPS analysis is a useful tool to help you make better investment decisions, but it is not the only tool. You should also use other tools and methods to complement your EPS analysis and enhance your investment strategy.

Read Other Blogs