What fundamental indicators are most useful to pick good Penny Stock?
December 6, 2018 at 2:03 pm #91312
December 11, 2018 at 9:42 am #93749December 17, 2018 at 3:04 pm #94886
Don’t forget about EPS indicator. It’s really usefulDecember 17, 2018 at 3:09 pm #94887
EPS (Earnings per share) is the portion of a company’s profit allocated to each share of common stock. Earnings per share serves as an indicator of a company’s profitability. It is common for a company to report EPS that are adjusted for extraordinary items, potential share dilution. Most simply EPS is calculated as:Earnings Per Share Explained
How to Calculate Earnings Per Share – EPS
To calculate the EPS of a company, the balance sheet and income statement are used to find the weighted average number of common shares, dividends paid on preferred stock (if any), and the net income or earnings. It is more accurate to use a weighted average number of common shares over the reporting term, because the number of shares can change over time. Any stock dividends or splits that occur must be reflected in the calculation of the weighted average number of shares outstanding. Some data sources simplify the calculation by using the number of shares outstanding at the end of a period.
The calculation of EPS for three companies at the end of the 2017 fiscal year follows:
Basic vs. Diluted EPS
The formula used in the table above calculates the basic EPS of each of these select companies. Basic EPS does not factor in the dilutive effect of shares that could be issued by the company. When the capital structure of a company includes stock options, warrants, restricted stock units (RSU), etc., these investments, if exercised, could increase the total number of shares outstanding in the market. To better show the effects of additional securities on per share earnings, companies also report the diluted EPS, which assumes that all the shares that could be outstanding have been issued.
For example, the total number of shares that could be created and issued from NVIDIA’s convertible instruments for the fiscal year ended in 2017 was 33 million. If this number is added to its total shares outstanding, its diluted weighted average shares outstanding will be 599 million + 33 million = 623 million shares. The company’s diluted EPS is, therefore, $3.05B / 623 million = $4.82.
Sometimes an adjustment to the numerator is required when calculating a fully diluted EPS. For example, sometimes a lender will provide a loan that allows them to convert the debt into shares under certain conditions. The shares that would be created by the convertible debt should be included in the denominator of the diluted EPS calculation, but if that happened then the company wouldn’t have paid interest on the debt. In this case the company or analyst will add the interest paid on convertible debt back into the numerator of the EPS calculation so the result isn’t distorted.
Expanding the Basic EPS Formula
Earnings per share can be distorted both intentionally and unintentionally by several factors. Analysts use variations of the basic EPS formula to avoid the most common ways that EPS may be inflated.
Earnings Per Share Without Extraordinary Items
Imagine a company that owns two factories where they make cell phone screens. The land on which one of the factories sits has become very valuable as new developments have surrounded it over the last few years. The company’s management team decides to sell the factory and build another one on less valuable land. This transaction creates a windfall profit for the firm.
While this land sale has created real profits for the company and its shareholders, it is considered an “extraordinary item” because there is no reason to believe the company can repeat that transaction in the future. Shareholders might be misled if the windfall is included in the numerator of the EPS equation, so it is excluded. A similar argument could be made if a company had an unusual loss – maybe the factory burned down – which would have temporarily decreased EPS and should be excluded for the same reason. The calculation for EPS excluding extraordinary items is as follows:
Earnings per share from continuing operations
A company started the year with 500 stores and made $5 EPS. However, assume that this company closed 100 stores over that period and ended the year with 400 stores. An analyst will want to know what the EPS was for just the stores that the company plans to continue with into the next period. In this example, that could increase the EPS because the 100 closed stores were perhaps operating at a loss. By evaluating EPS from continuing operations an analyst is better able to compare prior performance to current performance.
The calculation for EPS from continuing operations follows:
Importance of Earnings Per Share – EPS
Earnings per share (EPS) is one of the most important variables in determining a share’s price. It is also a major component used to calculate the price-to-earnings(P/E) valuation ratio, where the ‘E’ in P/E refers to EPS. By dividing a company’s share price by its earnings per share, an investor can see the value of a stock in terms of how much the market is willing to pay for each dollar of earnings.
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