Knowledge corner of Hot Stock Alerts
And this time - we will talk about earnings per share
The EPS – the metric that tells the true story of earnings
- Everyone talks about EPS (earnings per share), but how many truly understand what lies behind this number?
- This is one of the most important metrics in companies' financial reports.
The problem with this metric is that it can be a source of illusions or reveal the economic truth.
Let's dive in and explain why it is so important for investors.
So what exactly is EPS? EPS (Earnings Per Share) is a measure that checks how much net income a company generates for each of its individual shares.
The calculation is simple: Company earnings ÷ Number of shares = EPS For example: If a company earned $100 and has 100 shares, then each share "earned" $1. If the company lost $100, then each share "lost" $1.
That sounds pretty clear, right? But here's the big trick:
The number of shares is not constant!
The number of shares changes constantly!
Companies constantly manipulate their number of shares, and this directly affects EPS.
Buyback – repurchase of shares. If a company buys back shares from the market, its number of shares decreases – and then the earnings are spread over fewer shares, which increases the EPS even if the earnings themselves did not truly grow!
New offerings – investor dilution. If a company issues more shares, the number of shares increases – and then the earnings are spread over more shares, which decreases the EPS, even if actual earnings are growing!
So if you see a company reporting a sharp rise in EPS, it doesn't always mean its earnings truly jumped – it could simply be due to a buyback.
And on the other hand, if you see a company whose EPS is not changing, it doesn't mean it's not growing – perhaps it's simply issuing more shares!
This is exactly what leads us to the example of Palantir ($PLTR).
The case of Palantir – growth without a change in EPS?
During the first quarters of 2024, Palantir showed impressive growth in revenue and earnings, but whoever looked only at its EPS saw a stagnant figure – with no growth at all!
How is this possible?
The answer: Palantir constantly issues shares, meaning its number of shares increased, which caused the EPS to remain flat, even though the company did actually grow.
So what's the conclusion?
When a company dilutes shares, maintaining the same EPS actually means real growth – because it needs to earn more not to lose ground!
Why is all this important for investors? Investors who do not understand the dynamics of EPS may misinterpret financial reports – and miss out on growing companies or get excited about companies that are not truly progressing.
Not every rise in EPS is a sign of real growth! Sometimes it's just because the company performed a buyback and reduced the number of shares. Not every stagnation in EPS indicates weakness! It could be that the company is growing but simultaneously issuing more shares. Always check the full picture! Look also at the total net income, the number of shares, and whether there is dilution or a buyback.
The bottom line – don't just look at the numbers, understand the story!
EPS is an important tool, but only in the right context. If you are smart investors, don't let just one metric dictate your decisions – dig deeper, understand what's really happening, and invest smarter!
Smart investors don't just look at the numbers – they understand what lies behind them!