Absolute EPS And Intrinsic Value

[Phil]

Does the absolute amount of EPS reflect the quality of a company or it's intrinsic value? Some companies are making $14 per share while othes are making $2 in the same industry. Also, how often do the average number of total shares outstanding change significantly for any given company?

[Stocktrading101]

Originally Posted by Phil

Does the absolute amount of EPS reflect the quality of a company or it's intrinsic value? Some companies are making $14 per share while othes are making $2 in the same industry. Also, how often do the average number of total shares outstanding change significantly for any given company?

1. EPS is a debated fundamental figure as far as analysis is concerned. I think you are right by comparing one company's numbers to others in its same industry. This is a smart way to go.

2. Total shares outstanding do not change unless A. there is a stock split, B. the company issues new issues (through a separate additional offering). You will know if a split occurs as it will be announced beforehand.

Hope that helps.

[Matt Moss]

Does the absolute amount of EPS reflect the quality of a company or it's intrinsic value? Some companies are making $14 per share while othes are making $2 in the same industry.

EPS is derived from: [ TOTAL EARNINGS AVAILABLE TO COMMON SHAREHOLDERS ] / [ TOTAL COMMON SHARES OUTSTANDING ] So the absolute amount of EPS is a relative term, as companies will have different levels of common shares outstanding. To illustrate, imagine a company that has 1 share outstanding and is earning $5 per share. Now imagine another company with 100 shares outstanding that is earning $4 per share. Which company is making more money? The second is making a great deal more, despite only having $4 EPS vs. $5 EPS. EPS does not reveal everything about a company's intrinsic value, but can offer information to assist an analyst. One can analyze % growth in EPS, quality of EPS, variability of EPS, and many other factors to compare companies.

Also, how often do the average number of total shares outstanding change significantly for any given company?

Total shares of a company can change when: A company does a secondary offering. A company does a stock split. A company issues a stock dividend. An optionholder or warrantholder of a contract issued by the company exercises his or her contract. A holder of convertible preferred or convertible bonds elects to convert. Diluted EPS is a figure that takes into account any potentially dilutive activities. If a company has warrants or convertible securities that are in the money, Diluted EPS takes into account the dilutive nature of these securities and will adjust EPS to factor for these potential actions. Remember, EPS is at the bottom line of the income statement, which means every line before it is an opportunity for management to engage in funny business. An analyst will take a critical eye toward the source and nature of earnings to determine their quality. When developing an intrinsic value, no one metric is the holy grail which will give you a clean answer. An analyst must take many different facets about a company into consideration. Due to the uncertainty of the quality and the variable nature of business, value analysts like Buffett and Graham have always stressed allowing for a margin of safety between an analysts' calculated intrinsic value and the current market value of a company.