Use EPS for initial sounding, P/E ratio for detailed fundamental analysis

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Compared to the rather rough figures published by the company, such as profit and turnover, EPS provides a good indication of how much an individual share is actually earning. I would advise beginners to first look for the securities with the best EPS on the basis of the return on shares compared to all competitors in the respective sector. In most cases, there is already a good upward trend.

However, EPS should only be the starting point for a more fundamental analysis. If, for example, you include the use of earnings on the basis of the payout ratio, you will know whether reinvestment will increase returns or higher payouts will increase dividends.

You can also relate the current P/E ratio to the results of the last ten years. If it is lower on average than in the past decade, the whole market is probably undervalued. Investing at the right moment could mean an abrupt upward price correction later.

The P/E ratio in turn puts the earnings per share in relation to the price and offers you an insight into the psychology of investors: how is the paper valued by investors in relation to the actual earnings? Too high or too low and why does the indicator swing one time in one direction and the other time in the opposite direction?

My tip

First register with your mail at a trustworthy broker with a transparent fee structure like Markets.com. Here you can practice in the demo account with key figures such as the EPS, the P/E ratio and the payout ratio as well as with technical analysis using charts.

Afterwards, you verify yourself with your personal data, enter your contacts regarding taxes and load money into the account at the broker. Now you devote yourself intensively to fundamental analysis, add the first companies to your watch list on the basis of the EPS and thus come across the best stocks in 2021.

The practical thing about exness client area conditions is that you do not have to calculate the ratios yourself. The figures are given to you in the statistics as well as the minute-by-minute charts in the form of doji candlesticks. So with good preparation, hardly anything can go wrong with your investment via broker.

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FAQs on earnings per share:

What is a good EPS value?

You should look at EPS primarily in comparison to other companies in the industry and previous years. A year-on-year growth of around 10 per cent is an indication that the shares are performing well.

What does the earnings per share say?

Earnings per share converts how much of a company's annual net income is attributable to a single share. From this you can see how broadly the profit is spread over the shares.

How do you calculate earnings per share?

You simply divide the net profit by the number of outstanding shares and get the EPS.

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