It is earnings season and many companies have announced their December quarter numbers. If analysts are to be believed, this quarter’s results has been one of the better ones in the last six to seven quarters. Of the 36 companies in the Nifty 50 that have announced their December results so far, 25 companies have reported a rise in earnings per share (EPS).
For a shareholder, the net profit of a company is an important figure he should note. Another critical number to note is EPS.
What is EPS?
EPS is the portion of a company’s profit that is allocated to each outstanding share. A company’s EPS is calculated by dividing the net profit for a particular quarter by the total number of shares.
For instance, if company A has posted a net profit of Rs.1,000 for the December quarter and it has a total of 100 shares, its EPS for the quarter will be Rs.10 per share.
When does EPS increase?
Increase in EPS doesn’t necessarily mean that the company’s profitability has gone up; profits can also remain flat or even fall.
A major reason why EPS could increase is because the company has gone through a buy-back programme during the quarter, due to which the number of shares has gone down. Suppose the company A that we mentioned earlier saw its profit dipping to Rs.950 and its total number of shares went down to Rs.90 due to its share buy-back. Here, the EPS would go up to Rs.10.55 a share.
Other reasons include a merger or an acquisition that could lead to a decrease in the number of shares of a company, which could prop up its EPS.
When does EPS go down?
Just like the increase in EPS, a dip in this figure does not always mean that the profitability of a company has taken a hit. Things like a follow-on public offer or an activity to raise fresh capital during the quarter could decrease the EPS. Even share splits can reduce the EPS figure. Let’s look at company A again. Let’s assume that its profit goes up to Rs.1,100 and it raised its total number of shares to 120. This would mean the EPS would go down to Rs.9.16 per share, while the company remains profitable.
What should you do?
Though EPS is an important number to note, it should not be the only figure to drive your decision. If you own a stock whose EPS has fallen, you should not be in a hurry to exit. When deciding on whether to stay invested or not in a stock that has witnessed a fall in EPS, you should identify the reason behind the decline.