Finance Info

Earnings Per Stock (EPS) EPS is a well known and widely used investment ratio. It is calculated as: Profit After Tax Earnings Per Stock (EPS) =Profit After Tax /Total Number of Equity Stocks Issued

This ratio gives the earnings of a company on a per stock basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 stocks with a face value of $0.5 each in XYZ Ltd. Suppose the earnings per stock of XYZ Ltd. is $0.05 per stock and the dividend declared by it is 20 per cent, or $0.02 per stock. This means that each stock of XYZ Ltd. earns $0.05 every year, even though you receive only $0.02 out of it as dividend. The remaining amount, $0.03 per stock, constitutes the ploughback or retained earnings. If you had bought these stocks at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your stocks. Ideally speaking, your stocks should appreciate by 40 per cent from $0.5 to $0.15 per stock.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per stock. Earnings per stock is the true indicator of the returns on your stock investments.