How To Screen Stocks Using The Earnings Per Share Indicator

earnings per share

Earnings per share are, without question, one of the most important indicators experienced traders use. Today, I’ll tell you all you need to know about this indicator and how investors use it to make money on their trades.

Earnings per share, also known as EPS rating, allows traders to calculate the growth and stability of a company’s earnings and its shares’ profitability. Positive earnings per share indicator mean the stock has been profitable for the quarter, while a negative EPS rating tells us that the company has lost money.

Naturally, a company’s EPS report, released every quarter, draws a lot of attention from analysts and traders alike since it’s a critical quarterly performance measure. However, experienced traders understand that there’s more to the indicator than meets the eye, especially since it can be calculated and manipulated in various ways.

What is Earnings Per Share

Earnings per share is a metric that estimates corporate value since it tells us how much money a company makes for each share of its stock. In its most basic form, the earnings per share value are calculated by dividing a company’s net income by its available shares. Thanks to this indicator, you can separate industry and sector leaders from the run-of-the-mill, poorly managed companies that often end up causing losses in your stock portfolio.

Many experienced traders opt to calculate the diluted EPS and an additional EPS that excludes extraordinary items. This is because unscrupulous managers may leverage accounting methods and stock buybacks to inflate the company’s financial indicators. The reason behind this is simple enough: to lure you into making unwise investments. We guarantee that once you’re done reading this thorough guide, you’ll never fall for artificially-inflated EPS indicators again.

Earnings per Share Diluted and Basic

There are some key differences between the earnings per share diluted and basic forms, with many traders guiding themselves with the stock indicator’s diluted version. The Basic EPS calculation is pretty straightforward: you divide the company’s net income by the number of available shares. On the other hand, the diluted EPS accounts for all the shares that could exist if all of its convertible securities were exercised at the time.

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Basic EPS formula.

These additional calculations are done because the EPS can often be deceptive. For instance, if a company buys back its stock, the EPS will also increase, which some might interpret as an attempt to manipulate its financial indexes.

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Diluted EPS formula.

Do keep in mind, however, that stock buybacks are often done for equity value increase, reducing the cost of capital, dilution caused by employee stock option plans, and company consolidation. It’s not always done to deceive potential investors that blindly follow a company’s EPS index.

Some accounting practices, such as counting unpaid sales as profit and writing off unpaid expenses, can also muddy the water. Given their line of business, some companies follow Cruel Accounting practices for legitimate and practical reasons, but some might maliciously incorporate them to improve their financial stats. This prompts many investors to check the EPS against the company’s cash flow to ensure stock buybacks and accounting practices check out before investing.

With that out of the way, let’s go over how to fully leverage a company’s EPS indicator during your technical analysis. We’ll also explain how to calculate each of these indicators by yourself, in case you don’t have a premium technical analysis tool that can do it for you.

Earnings Per Share in Technical Analysis

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Always scan for quarterly EPS growth.

Exceptional stocks always present a strong growth record in recent years and high earnings in previous quarters. This translates into percent increases in the earnings per share indicator, which is, without question, a powerful signal that experienced trades will scan for. After all, a company that steadily increases its EPS from quarter to quarter is a proven stock that has remained profitable for some time now, and there’s likely a good reason for it.

If you’re into sports, you’ll know that legendary teams have amassed all sorts of titles and trophies thanks to their powerful roster. You should manage your stock portfolio in a similar fashion: just as teams want the strongest, fastest, and most competent players out there on the court, you’ll also want the most profitable stocks in your portfolio to make money for you.

Whether you’re a veteran trader (or you’re currently learning the ropes), you’ve likely heard about specialized trading tools that help you navigate stock charts in record time. Tools like MarketSmith, TradingView, and Thinkorswim allow you to add indicators and trend lines to your stock charts to better understand how the market is trading a specific share. They also help you screen for shares with strong growth indicators in seconds.

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Track as many previous Earnings per Share reports as possible in your Technical Analysis tool.

We’d highly recommend that you track a share’s earnings per share during the last reported year, the EPS percentage change during the last reported quarter, and, if possible, the Earnings per Share percentage change for the last two quarters. While this might seem like a lot, it’s important to remember that we’re tracking for solid companies with a proven track record of growth, and steady earnings per share growth certainly fit the bill.

Some of these tools might have built-in EPS ratings or leverage IBD’s ratings. Essentially, these EPS ratings compare a company’s earnings per share growth with all other domestically traded companies in the tool’s database to determine how profitable a share is. An EPS rating of 90, for instance, means a company has outperformed 90% of all other companies in terms of annual and recent quarterly earnings performance. Many of these tools also analyze the Relative Strength indicator since it allows traders to enter and exit the market at the right time. Together, these indexes have proven quite effective at screening shares and identifying entry and exit triggers.

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Some tools offer proprietary EPS ratings that streamline the screening process.

We strongly recommend you to read the tool’s FAQ and help sections to determine how they calculate these EPS ratings. Make sure that both annual and recent EPS indicators are part of their calculations, or customize your charts to always show these key indicators.

A bird’s eye view of the company’s sector is also beneficial, especially when analyzing an increasing or decreasing EPS. Increased capital expenses, new introductions, or even macro variables may affect an entire industry or sector and explain why a prospective share’s EPS either grows or shrinks. Evaluating these market trends is essential if you wish to become a successful trader in the long term.

Lastly, it’s important to use the EPS and its quarterly variations with other stock indicators such as the accumulation-distribution score, the Relative Strength Indicator, and the Moving Average Convergence Divergence (MACD) to maximize your trade’s success chances. These indicators and indexes, after all, each offer a clue that, together, can predict where the market will move in the future.

What is a Good Earning per Share

Some investors jokingly say: “a positive EPS is a good EPS,” simply because it means that the company remains profitable for the quarter. The joke aims to grossly simplify an answer that requires you to analyze several factors, such as sector performance, analysts’ expectations for the quarter, and cash flow comparisons.

Your analysis needs to examine how other companies fare in their sector and compare their respective EPS. If one of its peers consistently outperforms your trade candidate, you’ll better understand a stock’s potential profitability and overall company performance in any given sector. Establishing these rough benchmarks will prove invaluable in any future trades you wish to conduct.

Sometimes, two factors, such as analysts’ expectations and a company’s performance, work together to create an uptrend. A particularly well-known CEO might’ve recently been appointed to lead a company and make strategic decisions, directly affecting the analysts’ estimates for the next quarter and overall annual growth. This combination of expectations, estimates, and a company’s efficiency and performance in the sector might all come together to swing a trade in your favor or sink it to bearish depths.

Once you’ve analyzed the company’s P/E, industry standards, EPS variations over the quarters, and operating cash flow, you can determine whether a company’s earnings per share are good or lacking.

Earning Per Share Calculator

Most Technical Analysis tools will calculate a company’s EPS for you and automatically incorporate it into your chart. Python also allows you to scrape financial data from websites and visualize its data using Panda’s library and functions, which can serve as a somewhat basic alternative for premium technical analysis tools.

However, if you wish to use a Python script that calculates a company’s EPS based on your input, feel free to use the following code:

## Basic EPS Calculator

net_income = int(input("Enter Net Income: "))
dividends = int(input("Enter Dividends: "))
shares = int(input("Enter Number of Shares: "))

new_income = net_income - dividends
eps = new_income / shares
print ("Company's EPS is: $" , (eps))

We’ve built this very crude calculator in mere seconds using the knowledge learned from our Python number types piece and some basic functions such as print and input. You can incorporate it as part of a complex, all-encompassing tool that calculates all sorts of stock indicators for you.

However, please remember that premium technical analysis tools are worthwhile investments for those wishing to enter the trading world. Thankfully, most are affordable, with some even offering free trials and free versions you can use before purchasing a subscription.

Closing Words

Earnings per share are, by far, one of the most used indicators in technical analysis since it tells seasoned traders how profitable each share is. As any other stock indicator in technical analysis, it’s meant to be used with several other indexes (during a thorough stock chart analysis) to determine whether it’s a good fit for your stock portfolio.

Most premium technical analysis tools already incorporate proprietary EPS ratings into their indicators list. However, some traders still prefer manually tracking earnings per share percentage changes over the quarters to ensure they’re buying profitable shares. Regardless of your choice, if this indicator is used as a clue or a small piece to a larger puzzle, you’re guaranteed to conduct effective trades in the long run.

Dan Aveledo
Bachelor of Business Administration. Specialized in SEO, web development, and digital marketing during the last decade. Currently discovering the endless possibilities that coding offers. In my spare time, you'll find me lifting weights and creating tools that make my life easier.