Investments / Stock Market · September 16, 2021

What Happens If Earning Per Share Becomes Negative

What is Earning Per Share (EPS)

Earning Per Share, which is commonly regarded as EPS is a financial ratio used by many fundamental analyst to study the performance of the company along with many other ratios.

EPS is defined as the company’s net profit divided by the total shares of the company. EPS tells us the profitability of the company and the net increase in profits from previous quarters. Higher the EPS, higher are the profits made by the company.

EPS tells us how much net profit per share an investor has made by investing in that company.

Understanding how EPS (Earning Per Share) work

Earning Per Share is an indication that gives the investors how profitable the company is and at what extent is the company growing on the basis of the money it makes.

EPS is also used to determine the PE (Price to Earning) ratio, which is yet another fundamental tool for research analyst. The E in the PE ratio stands for Earning Per Share.

In what scenarios can the EPS turn negative

Earning per share = Net profit / Total number of shares

In most of the scenarios, the total number of shares of a company does not constantly change (only in the case of stock split or bonus issue the number of stock tend to change).

Thus we can say that the EPS is directly proportional to the net profit made by the company.

For EPS to be negative there can be only one scenario, that is the company has made a loss in the financial year. In this case there is a negative net profit to the total number of shares. The more negative the EPS, the more the loss the company has incurred.

Theoretically, the investors that are holding on to a negative EPS stock are losing the intrinsic value of their holding. It is an indication that the investors need to decide their action before these losses get reflected in the stock price.

What does a negative EPS tell us

One of the ways to track a performance of a company’s growth is by studying the EPS history. Research Analyst usually predict the future profits of the company by studying the Earning Per Share of different financial years.

When the EPS of a company turns negative, it simply says that the company has made a negative net profit. This means that the investors have made a loss by holding that share.

A negative EPS is a bad fundamental behavior and investors need to keep away from such stocks to avoid losses even if the stock price is on the rise.

If a company shows a rising EPS, it denotes that the company is in a growth stage, and is a good stock, where it is not only delivering a positive year on year profit, but the current year profit is more than that of previous year.

Things to keep in mind

Higher then EPS does not possibly bring the stock price higher. There are many factors that determine the price of the stock to rise or fall and human psychology with the market remains at the top.

An investor needs to look out for companies that are having a rising EPS year on year. This denotes that the company is making a good profit from its business. Sooner or later the profits will reflect in the stock price.

You may also like to read about Market Capitalization: The Right Way To Track Company’s Growth

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