Before you invest in those stocks, it is important to know if your investment is going to yield the highest profitable returns possible in a chosen sector. The most reliable tool to test for optimal profitability is the Earnings Per Share (EPS) shareholder ratio
EPS is the most frequently used of all accounting ratios. It ia believed to give the best picture of a company's performance.
To calculate EPS, divide a company's net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The net profit or loss attributable to ordinary shareholders is earnings after tax, minority interest and extraordinary items available for equity shareholders.
Every information needed for the calculation of EPS is available in a company's financial statements.
But the EPS shouldn't be used in isolation to make an investment decision. Other factors must be considered before a final decision is reached. Don't ignore the following factors;
1. Evaluate the policies of companies (operating within the same sector is recommended) on;
A. Depreciation and,
B. Replacement of assets.
2. Compare EPS of a company with the EPS for the same organization in respect of previous years. Repeat the same comparisons over time for all other companies (within the same industry- sector relevance is very important) you have selected to choose from,
3. Company size is also very important. To make a sound choice among companies within a given sector, the EPS of companies of similar size must be evaluated.
Decision- Tje higher the Earnings Per Share , EPS, of a company, the higher is its profitability.
