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Earnings Per Share (EPS) - Explained in Hindi | #42 Master Investor - YouTube
Channel: Asset Yogi
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Music
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Namaskar, my name is Mukul and you are welcome to the Asset Yogi channel
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Where we unlock the knowledge of finance.
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When you want to invest in the stock of a company
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Then you have to do a financial analysis.
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You calculate some ratios.
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Out of them, one ratio is the PE ratio i.e Price Earning Ratio
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So the E in this is the Earning Per Share
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This earning per share is used in some ratios
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So you have to calculate the earnings per share.
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For example, in PE ratio, you get to know if any stock is
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undervalued or overvalued in comparison to other stocks
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or in comparison with Sensex or Nifty
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So this earning per share is quite an important matric
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It is not very difficult to calculate the earnings per share.
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But in this video, we will try to make an intuition of what exactly is earning per share.
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And how is it used in ratios?
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And what is its usefulness?
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We will understand this in this video.
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So please watch this video from the start till the end
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Let's go straight towards the blackboard.
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So let's understand earnings per share with the help of an example.
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Assume there is a shoe manufacturing company
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We will analyze its income statement.
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I will take a simple statement
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Assume this show manufacturing company has done
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the sale of approx 2 crores
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Its revenue is 2 crores a year.
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And its cost of goods sold is 40 lakhs Rs
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This means the cost of shoe manufacturing is 40 lakhs a year.
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The marketing and sales expense is approx 20 lakhs Rs a year
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Office and admin expense means salary, rent
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and the other expenses the office are approx 30 lakhs Rs per year
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So we deduct all these expenses from the revenue
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All these operating expenses
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So this will be 20+30+40= 90 lakhs expenses in total.
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So you will get the operating profit
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When you will deduct 90 lakhs from 2 crores
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Then you will get 1 crore 10 lakhs Rs
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What are the expenses other than this?
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There can be an interest portion of the company
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Assume they have taken a loan for creating their assets
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I will take an example here.
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Assume the total assets of the company is worth 6 crore Rs
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We will write assets here
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So now, how are these assets made by the company?
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Assume the company has a debt of Rs 3 crores
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Debt means the liabilities.
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And the remaining 3 crores is equity
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This means either the promoter have invested by themselves
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or the money belongs to the shareholders.
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So the equity portion is 3 crores
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So the interest portion of this 3 crore debt
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will be 36 lakhs Rs per year.
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So you will deduct that from the operating profit.
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And second, there is depreciation on factory and plant and machinery
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We have to deduct the depreciation also
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And amortization also happens
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Some assets are amortized
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So I am removing depreciation and amortization
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We will only talk about simple income statements.
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We will assume we are only deducting the interest portion from 1 crore 10 lakh Rs
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So your profit before tax is 74 lakhs
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As I have told you, there are extra heads of
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amortization and depreciation.
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We are only doing it for simplifying it, only for understanding
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earnings per share, we are removing these two heads.
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Once you got profit before tax, after that,
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you pay taxes. We will assume the approximate rate of tax.
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Assume the tax is 30%. So we will deduct 2220000 from 7400000
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So our net profit will come
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So the net profit of 5180000 is basically your earnings.
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So see, sometimes people get confused
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They consider revenue as earnings.
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But revenue is not the earnings.
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Your net profit is your earnings.
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So what is the meaning of earnings per share?
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These earnings are the earnings of the whole company
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But there are many shareholders in the company
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Generally, shareholders are of two types. The first is preferred shareholders
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The one we call a preferred stock
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And the second is your common shareholders
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Preferred shareholders can be strategic shareholders
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Those stocks are not traded.
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And we will talk about common shareholders in earnings per share.
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Because when you are analyzing a stock then you are concerned
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about the common shareholders. So we calculate earnings per share
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of common shareholders. So what is the formula?
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The total net profit of 5180000
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You will deduct preferred dividends out of this.
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So the dividends issued to the preferred stockholders
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You will deduct that, whatever amount the company has declared.
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And then you will divide it by the total number of common shares
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So you will get earnings per common share.
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So let's move forward in our example
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So the net profit was 5180000 Rs
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Assume the preferred dividend declared in this year
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the company has declared 180000
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And we will assume the total outstanding common shares
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are 5 lakh shares of the company
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So your profit for the common shareholders is 50 lakhs
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Divided by 5 lakh shares
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So the earning of one share will be 10 Rs
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So the earnings per share, in this case, will be 10 Rs
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So let's try to understand what is the meaning of these 10 Rs?
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Assume you have 100 shares of the company
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And the price of one share is let's say 150 Rs
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Rs 150 each share
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So we have to see is that what will happen to your earnings
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So what will be the earnings of the 100 shares
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You will multiply 100 and 10
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So the earnings of 100 shares will be 1000 Rs
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So now the question arises is that this is your 1000 Rs
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Either the company will give it to you as it is
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Your earnings will be 1000 Rs a year for your investment
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What was your total investment? It was 100 shares at 150 Rs each.
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The total investment was 15000 Rs
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You have invested 15000 Rs and you are getting 1000 Rs every year
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Then it's not a bad thing.
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But what companies mostly do is that
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They do not distribute these 1000 Rs as dividends
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They invest most of the money in growth
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So some money is invested in growth and
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some money can be also distributed as dividends
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We will assume here that the company is investing
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all the money in the growth.
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So when it is investing in growth, then why the price of its stock should remain 150 Rs
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It should increase further. So now we will see
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the price is 150 Rs on today's date. Is it correct or not?
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So how will we see that?
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For that, we will see the PE ratio.
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PE ratio means the price of the stock.
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Price per share divided by earnings per share
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We will see how is its price as compared to the earnings per share
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So what is our price per share?
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It is 150 Rs divided by 10 Rs (earnings per share)
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So the PE is 15
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So the meaning of this 15 is that its stock price of 150 Rs
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is 15 times as compared to the earnings per share.
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So what does it mean?
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It means you can compare this 15 with the PE of the other competitors
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So you can see that the PE of the competitors
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is more or less in comparison to them.
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And you can compare it with Sensex, that what is the PE of the Sensex
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And what is the PE of the NIFTY
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You can also see historical PE that was the PE before.
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So you can see historical PE.
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So you can also see the historical PE of Sensex and NIFTY
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And you can also see the historical PE of the competitors
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Let's understand this with the help of an example
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Before that, I will tell you three terms
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related to the EPS which you may have heard or see
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The first is Trailing EPS. It is used quite often.
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The reporting of the last financial year, whatever the earnings of the last financial year
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Its EPS is calculated and we call it trailing EPS
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Assume the financial year 2017-18
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This means this is the FY of 1st April 2017 to 31st March 2018
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So its financial reporting will be done in September 2018.
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So you will get all these financial figures by September 2018
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After that, you can calculate the trailing EPS.
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So if we talk about today, assume July 2018 is going on
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Then you will not get these earnings.
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That's why you will get the trailing EPS of the last year 2017
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So when you see any trailing EPS
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So get this, we are talking about the trailing EPS of last financial year
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Other than this, you will get to see Current EPS
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when you read the financial statement of any company
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So what happens in this is current year's earnings are taken
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There are two earnings of the current year- part actual and part projection
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If we assume on today's date let's say
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We have the current earnings of April 2018 to June 2018
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So they are taken as actual
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And the remaining financial year from July 2018 to March 2019
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We will take it as projections
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So our current EPS will be calculated.
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So another one is Forward EPS
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If we want to estimate for the future years
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Then the estimate of earnings are taken for the future years
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Assume we want to take the estimate of FY 19-20
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Then it will take your future earnings estimate
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It will be considered as the Forward EPS
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So whenever you see an EPS, then find out which
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financial year are we talking about.
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Let's come back to the example
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We will try to compare two companies
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We will see their EPS and PE
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Assume there is a company A
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We will take our old example
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Let's say its EPS is 10 Rs
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And it is traded at the price of 150 Rs on today's date.
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Then its PE will be 15
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We will assume a second company
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Assume this is its competitor, this is another shoe manufacturing company
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Let's say its earnings per share is 15 Rs (whether the shares are more 贸r less)
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So see, the question that arises here is that
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The earning her share is 15 Rs, it is more than 10 Rs
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How is its price compared to the earnings?
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Let's say its stock price is trading at 300 Rs
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Now see, its earning per share is more
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But the price is also more
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The price is double here
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So we will try to calculate its price earning ratio
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So this will be 300梅15
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So its PE will be 20.
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This means this stock is expensive
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And the other one is cheap
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Now we can also see the PE of another sector
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Assume this there is a shoe manufacturing company or APRIL company
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They work in the same way
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Or there are cloth manufacturing companies
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They are all similar types of companies.
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So if we calculate the PE of the whole sector like APRIL or fashion industry
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Then it may be 18. We will take it as an example
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So according to sector also, this company is cheaper
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Its PE is only 15
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The stock is traded at less premium
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It is only 15 times compared to earnings per share
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This stock is traded 20 times at earnings per share
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And the whole sector is traded at 18 times
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So we will say if we talk about only PE of this company
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Then we can buy this stock
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This is a value buy stock
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So this was about PE and earnings per share
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You can not tell by only seeing the PE and earnings per share
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If that stock is worth buying or any stock is expensive or cheaper
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You have to see many other factors
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We will cover that in our coming videos
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Like you have to see the debt, how much debt is on the company
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And many other things are there
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So we will talk about that in the coming videos
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So I hope in this video, the concept of earning per share
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and the price earning ratio is clear to you
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I hope you liked this video.
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Then like and share the video
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If you have any suggestions or you want to suggest any topic for the future videos
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Then you can comment below
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I read all your comments regularly
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So tell me by commenting what other topics should I cover
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I share many interesting topics related to investment and finance daily
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So let's meet in the next video
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Till then keep learning, keep earning
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And be happy as always.
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