Analysis of Asset Allocation

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Fundamental Analysis: Earning per Share
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Introduction

Since earnings increase equity, and increased equity increases investors value in the form of a higher market price, we can suggest you a good formula if you want to make money on the stock market:

Invest in companies that earns and that will earn money!

The only problem is that you have to find these precious companies before the other investors otherwise you will pay too much.

Earning per Share (EPS)

EPS is probably one of the most known indicator. EPS is defined like this:

EPS = Net Income/Number of common shares outstanding

EPS is directly constructed out of the official figures published by the company and thus should not be taken as such. We have already spoken of the limitations of the balance sheet figures but the EPS can also be influenced by extraordinary incomes realized by the company during the last quarter or fiscal year.

The income you should focus on when computing the EPS is the ordinary operational income. But the operational income as such is not clean of extraordinary effects like foreign exchange fluctuation. Based on the above, a lot of derived EPS has been developed.

In the next topic, we will focus on Price/Earning ratio.

 

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