InvestorQ : How to evaluate the earnings of a company and are there are any earnings ratios that we can focus on for the same?
Arti Chavan made post

How to evaluate the earnings of a company and are there are any earnings ratios that we can focus on for the same?

Answer
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1 year ago


Why are earnings ratios important? They measure the quantity, sustainability and the quality of earnings reported by the company. From pure rupee earnings to more granular earnings, these ratios are all about breaking up the earnings to glean more meaningful insights into the story.

Earnings per share or the EPS

Earnings per share (EPS) are the most commonly the company's actual net earnings minus its preferred dividends and then divided by its weighted average number of shares outstanding. EPS can be reported in many different ways, some using historical results and others using analysts' estimates for future performance. EPS can also be reported for quarterly or annual periods. Historical EPS variations are derived from either the latest annual reported amount or from the sum of the past 4 quarters regardless of year. This latter form of EPS may be referred to as trailing 12-month, or TTM. Forward-looking EPS estimates may be derived from actual projections of the factors in individual companies' financial reports, sometimes called bottom-up analysis. A forward-looking EPS may also be derived from applying macro projections about the market environment to a company's past performance, which can be called top-down analysis.

Book value per share or the BVPS

This amount is the enterprise's total book value divided by its total number of shares outstanding. Book value is generally derived from the current market values of all tangible assets on the company's balance sheet. It is considered to approximate the money that shareholders could theoretically expect to receive if the company was to have been liquidated and all of its debts paid. Book value per share represents an alternative valuation of a company's shares (i.e., the value of the sum of its parts), and it may deviate significantly from the current market value of that share. Among the potential reasons for this variance are the value that the market puts on a company's management and the market's independent assessment of a company's tangible asset values. Variance between price per share and book value per share can also be driven by intangible asset values such as brand equity and goodwill.

Dividend Yield or the DY ratio

Dividend yield measures the immediate cash return that an investor receives from an equity investment. The concept applies to both common equity and preferred equity shares and does not include the market value of any options, warrants, or stock dividends that a company might also distribute to those shareholders. The formula for dividend yield is an annual cash dividend amount divided by current stock price. Typically, the annual dividend amount used is the sum of all cash dividends paid during the prior 12 months. However, dividend yield can also represent a projection using expected dividends for the coming 12 months. In some cases, the projection is an analyst's estimate. In others, it is the most recent quarterly dividend multiplied by 4 (or semi-annual dividend multiplied by 2). A dividend yield that uses a projection may be referred to as a forward dividend yield.