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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Introduction to Fundamental Analysis Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Income Statement Analysis

 - Great companies and good
    EPS growth do not guarantee
    stock market profits

 - The P/E ratio can create
    buying opportunities


 - Mishaps can create steals

 - Unusual charges reduce the
    value of your stock

 - ROE is the single best tool
    for investors

 - ROA is another valuable tool

 - Investors pay for high profit
    margins

 - Lenders can eat up all the
    profits

 - Depreciation creates
    deferred taxes, which have
    equity-like qualities


 - EPS is a complicated calculation

 

 


EPS is a complicated calculation

Many businesses are sophisticated; the accounting may become complex, and not as straightforward as one might like. There is no simple solution or answer as to how much a company makes per share. What seems simple on the surface is, in actuality, difficult.

Look at the EPS calculation. It’s calculated by taking net income available for common shares, divided by the weighted-average number of common shares outstanding. Net income, however, is not a vanilla figure. Net income must first be reduced by any dividends paid to preferred shareholders. Companies can also have net income from continuing operations and discontinued operations; there can be accounting changes, as well as unusual items. If there are acquisitions, investors will need proforma income or cash flow income.

The basic weighted-average number of shares outstanding may also be affected by common stock equivalents, such as stock options and warrants, which dilute the weighted-average shares outstanding. Companies, therefore, must report both basic and diluted EPS results.   

Most investors use diluted earnings per share from continuing operations, and compare the company’s growth from year to year, to determine how a company is performing and a fair value for the stock price.

To further complicate EPS, companies are also charging comprehensive income adjustments directly to shareholders’ equity. More and more companies are thereby reporting both increasing net income, and shrinking shareholders’ equity. If this trend continues, the need to report a comprehensive EPS is going to become more critical.  

Astute investors, therefore, need to look beyond press releases, news articles, summary annual reports and even research reports. Go to the original SEC documents; they usually contain the audited financial statements, showing the complete picture.

 

 

 

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