Month: March 2022

Preference shares, often known as preferred stock, pay dividends to owners before ordinary stock payments. If a company files bankruptcy, the preferred stockholders will be paid first, followed by the common stockholders. Preference shares frequently pay a fixed dividend, but regular stocks do not. Preferred investors sometimes do not have voting rights, although ordinary stockholders do.

There are four types of Preference stock:

• Cumulative preferred stock
• Non-cumulative preferred stock
• Participating preferred stock
• Convertible preferred stock

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Preference shares, often known as preferred stock, pay dividends to owners before ordinary stock payments. If a company files bankruptcy, the preferred stockholders will be paid first, followed by the common stockholders. Preference shares frequently pay a fixed dividend, but regular stocks do not. Preferred investors sometimes do not have voting rights, although ordinary stockholders do.

There are four types of Preference stock:

• Cumulative preferred stock
• Non-cumulative preferred stock
• Participating preferred stock
• Convertible preferred stock

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Non-cumulative preferred shares have no unpaid or missed dividends. Suppose the corporation chooses not to pay dividends in any particular year. In that case, non-cumulative preferred stock owners have no right or power to pursue such deferred payments in the future.

Participants’ preferred shareholders are entitled to dividends equal to the usually established preferred dividend rate plus an extra payout based on a predefined scenario. This additional payout is intended to be made only if common shareholders’ total dividends surpass a specified per-share threshold. 

Participating preferred shareholders may be entitled to the purchase price of their shares. Besides, they may also receive a pro-rata portion of the leftover earnings recovered by common shareholders on liquidation of the firm.

Convertible preferred stock allows owners to convert a certain number of preferred shares into a preset number of common shares at any time after a predetermined date. Usually, convertible preferred shares are swapped in this manner at the shareholder’s desire. On the other hand, a company may add a provision on such shares that allows shareholders or the issuer to force the issuance. The performance of the common stock decides the eventual value of convertible common stocks.

Features of Preference Shares

Several factors have contributed to the popularity of these financial products among investors. The majority of these traits have resulted in individuals earning more money even during periods of slow economic growth. 

The following are the most appealing features:

• Preference shareholders have significantly more influence than regular shareholders in any organization. They are among the first to receive dividend payments.
• These shareholders have no voting rights in any corporate operations. Thus, one of the downsides of preference shares is the attributes. Although this is a significant disadvantage for any investor, it is why so many companies provide these shares. The situation is comparable to that of debtors.
• One factor often overlooked is that investors pay dividends on particular dates. It is equivalent to a monthly salary.
• If investors want to purchase a particular sort of these shares, they should hunt for irredeemable preference shares. The owner of these shares has a say when they mature.

Different types of Preference Shares

There are several varieties of preference shares available in India, which are listed below:

• Cumulative preferred stock 

Cumulative preferred stock provides a provision that requires the firm to pay all dividends, including those previously missed, to stockholders before regular shareholders get their dividend payments. Although these dividend payments are promised, they are not always made on schedule. Unpaid dividends are known as “dividends in arrears” and must be paid to the stock’s current owner at the time of payment. The holder of these preferred shares might get additional payments (interest) at regular intervals.

Cumulative preferred stock is usually marketed at a lower rate than non-cumulative preferred stock since the cumulative characteristic reduces investors’ dividend risks. The cumulative feature is incorporated in most preferred stock issuance due to the lower cost of capital. Only blue-chip firms with a long history of dividend payments can issue non-cumulative preferred stock without increasing their capital expenditures.

• Non Cumulative Preference Shares

Non-cumulative preferred stock has no unpaid or missed dividends. Suppose the business chooses not to pay dividends in any particular year. In that case, the non-cumulative preferred stock stockholders have no right or power to demand such foregone payments in the future.

• Redeemable Preference Shares

In the case of redeemable shares, a company can purchase back shares from shareholders for its use at a set date or by providing prior notice after a particular period.

• Irredeemable Preference Shares

The company can only redeem these shares if liquidated or stopped operations. 

• Participating preference shares

Participating preference shares are those in which the dividend-paying firm pays greater dividends to shareholders in addition to the preference dividend. This payment is carried out at a certain rate. Furthermore, during the company’s dissolution, participating preference shareholders have rights to the company’s surplus assets.

• Non Participating Preference Shares

Non-participating preference shareholders are only entitled to fixed-rate dividends, not surplus profits. The regular stockholders receive the extra profits.

• Convertible Preference Shares

Ordinary shareholders can convert their shares to preferred stock. Investors desiring to earn a preferred share dividend use these shares and gain from a rise in the common stock price. Thus, the advantages are twofold – stable income from preferred dividends and the possibility of bigger gains if the common stock price rises. This conversion is possible within the time frame specified in the memorandum.

• Non Convertible Preference Shares

These shares cannot be converted into ordinary shares of the issuer.

• Preference shares with a callable option

After a given date and at a specific price, the issuing company can call in or purchase back callable preference shares from shareholders. The prospectus for such events specifies:

• the call price, 
• the date after which the shares can be called, and 
• the call premium. 

Holders of cumulative preferred shares can receive dividends retrospectively for dividends not paid in previous periods, while non-cumulative preferred shareholders cannot. Thus, a cumulative preferred stock will be more expensive than a non-cumulative preferred stock. 

Similarly, suppose the performance criteria are met. In that case, participating preferred shares pay higher dividends, such as corporate earnings reaching a particular threshold. Like convertible bonds, convertible preferreds allow the holder to swap their preference shares for common shares at a predetermined exercise price.

• Adjustable-Rate Preference Shares

For such investors, the dividend rate is not set; the market interest rates decide it.

Why Should You Invest in Preference Shares?

Investors prefer certain stocks for a variety of reasons. Selecting these shares is the best way to future-proof your wealth while reaping the benefits if you are an investor. 

For example, suppose the company files bankruptcy. Then, all preferred shareholders will have first and preferential access to the assets auctioned off. 

Similarly, preferred owners will benefit if the company’s common stock begins to perform extraordinarily. They can convert a portion of their holdings into common stock and profit appropriately.

Thus, such perks of preferred stocks will tempt consumers with low-risk appetites when it comes to investing amid uncertain times.

Many corporations provide callable preference shares, which is an outstanding feature. The phrasing suggests that the investor can repurchase these shares at any time. 

Finally, most investors are only eligible for a limited amount of incentives. Like any other financial instrument, these shares come with inherent risks, emphasizing the disadvantages of preference shares. 

It is difficult to predict how much dividends the shares will pay out during market volatility. Thus, those with a low-risk tolerance should avoid taking too many risks with this investing option. The risks, on the other hand, can be severe.

Finally, companies with substantial market capitalization and the ability to pay large dividends to a huge shareholding base over time frequently issue preferred shares. It might be a risk-reduction measure that may or may not be effective. 

Preferred shares are an excellent option for investors seeking long-term income assurances. They appeal to a wide spectrum of investors due to their sheer diversity and alternatives. If you want to invest in such companies, ensure you understand the advantages and disadvantages and that they meet your investment objectives and risk profile.

Blue-chip stocks are just a set of high-priced stocks in the market. These stocks have showcased excellence and performed well over the years in the stock market. The companies that fall under blue-chip stocks are of great value due to their stable financial record over the past decades. One more primary reason for companies to become the said stock is the regular and attractive dividend payouts credited to its shareholders, making it popular. 

However, before investing in a blue-chip stock, investors should properly understand the stocks and equip themselves with the requirements of investing here. Below are some of the factors and points about blue-chip stocks and companies one should know before investing. 

What are Blue-Chip Stocks?

Blue-chip companies have large market capitalization, and the stocks issued by them are usually termed as blue-chip stocks. Such companies have a high brand name, image, and capitalization valuation. Due to such reasons, the shares of these companies are highly priced in the stock market. 

Blue-chip stocks can remain unchanged or unaffected during adverse conditions of the market and bring high yields to their investors during favorable  market conditions. One crucial identification of such companies is their domination in the respective industry. Blue-chip stock companies give their shareholders attractive returns during the year as they are consistent and remain ineffective from inflations, recessions, or any economic conditions in the country. 

A strong and stable financial condition, visionary managerial group, and a consistent growth record are traits of identifying a blue-chip stock in the market before stock investment. An individual investor interested in investing in these companies can invest directly or indirectly in mutual funds. 

What does the term “blue-chip” mean?

In 1923, a Dow Jones employee coined “blue-chip” to characterize high-priced stocks. He used this term based on the game of poker, where three types of coins are used to place the bets. The three coins are differentiated as blue, white, and red chips, with the blue ones having a higher value than the other two. 

Today, blue-chip stocks no longer mean high-priced stocks, but instead refer to stocks of high-quality organizations that have endured the test of time. It is still debatable how big a corporation must be to qualify for blue-chip status. However, a market capitalization of $5 billion is a widely regarded benchmark.

Features of Blue-Chip Stocks 

• Credibility: The primary reason for blue-chip stocks to have high credibility is the reputation and the image. Secondly, such companies have appropriate finances to pay back the pending dues without any such obligations and hardships. 

• Prospects of growth: Blue-chip stocks are companies that have remained in the market for decades. These companies have faced hardships as well as excellent market conditions. Such stocks have flattened on the growth curve. 

Reasons for Investing in Blue-Chip Stocks 

Blue-chip stocks are desired by investors of all categories and ages. If a person is still unsure about investing in blue-chip stocks – some of the reasons to do are as follows – 

• Portfolio building: Investing in blue-chip stocks encourages diversification in the stock market. Doing so will allow the investors to enjoy the best under different categories and varieties. 
• High-yielding return: Blue-chip stocks are companies with financial stability. These companies pay regular dividend, making the return on investment high and stable. 
• Facilitate structuring: Investing in blue-chip stocks will allow investors to stabilize their portfolios and take higher risks in other investments. This gives the investors an allowance to structure their portfolios much more efficiently and effectively. 
• Acts as a cushion: Blue-chip stocks can withstand any uncertainty in the external and internal environment of the market, allowing investors to safeguard their hard-earned money from any losses and bringing high yielding returns over the years. 

Advantages of Investing in Blue-Chip Stocks 

Some of the key pointers that highlight a blue-chip stock are its excellent valuation in the stock and capital market, credibility and image value of the blue-chip company, and the financial stability over the years. If investors choose to invest in the blue-chip stocks, they will gain some advantages. 

• Liquidity: Blue-chip stocks enjoy attractive investment opportunities for investors interested in the market. The primary reason for this is the name and reputation of blue-chip companies that have gained credibility and goodwill in the stock market over the past decades through their stable performance. This allows the blue-chip stocks to facilitate direct sale and purchase, making the liquidity easier and simpler.  

• Able to achieve financial objectives: Investors tend to keep blue-chip stocks in their portfolio for a lifetime, allowing them to structure their portfolios under blue-chip stocks. 
• Regularity in returns: Blue-chip companies pay regular and attractive dividends to their investors, providing stability to the stocks and gaining trust of the investors.  

Who should typically invest in blue-chip stocks?

Blue-chip stocks represent companies with a good cash flow, stable dividends, fewer debts, and massive brand value. These stocks are not entirely risk-free, but they also help investors reduce the risk of their portfolios. Even if its financial performance is not up to par for a few months or a year, a firm with varied activities will not experience high volatility in its stock price because the company’s other business sectors usually cover the losses of one business function. 

These companies are popular among affluent investors who have a track record of making wise decisions; however, it is highly recommended that investors who have recently started investing in equities keep good blue-chip stocks in their portfolios to help them earn and learn investing nuances with real money invested with minimal risk.

Investment

When an asset is purchased with the intention of generating income or creating wealth through it is referred to as an investment. 

An investor may earn money from their investment in two ways. One, if they invest in a tradable asset, they may be able to benefit from it. Second, if they invest in a return-generating plan, like rentals, they will make money through the accumulation of gains. 

Share market

A share market is a market where shares are traded. On a stock exchange, you may only purchase and sell equities that are listed on the exchange. Buyers and sellers come together on a stock exchange.

Why invest in the share market

We invest in shares to grow our wealth over time. While some people consider shares to be a risky investment, several studies have shown that investing in the appropriate stocks for a long time (five to ten years) may give inflation-beating returns. People can have short-term strategies as well when investing in the share market. While stocks may be quite volatile in a short period, buying the proper stocks can help traders earn quickly.

How to invest in the share market

People try to invest their extra money to make their fortune. The share market is an excellent location to do so. People who trade in shares have the flexibility to work from anywhere they want, anytime they want.

Anyone may now start trading with the use of electronic trading accounts.

Steps you can follow to invest in the share market properly

 

Broker

Two platforms are generally used in India for Stock Exchange:

•   Bombay Stock Market (BSE) – The longest-serving stock exchange of Asia functioning since 1875
•   National Stock Exchange (NSE) – The biggest stock exchange in India

The first step for retail traders is to register with brokerage companies or Depository Participants (DPs) so that they can access the stock markets. It is crucial to pick the correct DP, since they are used by ordinary investors to buy, sell and store equities. They create a user interface for every investor to engage with the stock market. Opening a 2-in-1 Demat + Trading account with a DP is better, since such accounts enable an investor to trade stocks comfortably. Such an account is also advantageous since it allows investors to see their holdings at a single glance.

Some DPs also provide their users with real-time market data. An investor should, therefore, be cautious while selecting their broker or DP. Once they have chosen a DP, they can move to the next documentation step.

 

Documents

In order to trade in stock markets, an investor needs a Demat account for holding their positions and a trading account for executing their transactions. To do so, the following documents are required:

•   Address proof
•   Identity verification
•   e-KYC – Some DPs will let you electronically link the AADHAR card to the trading account, avoiding the need to scan the AADHAR card manually.

  Additional information, such as an annual wage range, may be needed. 

Understand trading and investing

After an investor has submitted all of their papers, the DP will double-check their information and then provide the login information to the investor. They may now connect to their account and begin trading using these data. A person can use one of two strategies:

•   Trading: This technique enables investors to profit from short-term price swings. Intraday traders who close all their positions by the end of the day use this technique. The goal is to take huge, voluminous positions and sell at the first sign of a price change.
•   Investing: Unlike trading, investing entails possessing the holdings for an extended length of time. The idea here is to locate undervalued businesses, acquire their shares, and maintain their position through the transient market ups and downs.
  

  Company selection

It is critical to undertake comprehensive research on a company’s background before purchasing its shares. A trader should consider the following things:

•   The firm’s revenue model 
•   The stability of the company’s management
•   The company’s rivals, and so forth.
  

  Diverse portfolio

It is critical to have a broad and diverse portfolio while investing in the stock market. As a trader, an investor must diversify their portfolio to ensure that it is not overly exposed to the ups and downs of a single industry. Traders could also consider investing in large-cap firms for consistent but low returns, as well as small-cap companies for higher but less predictable profits.

What factors do I consider before investing in stocks?

When an investor decides to buy a stock to invest in, it is critical to complete their research before putting their hard-earned money into it. When purchasing a stock for the long term, an investor’s objective should be to locate good value. However, before investing confidence in a firm, an investor should conduct comprehensive research, assess the stock’s fundamentals, and determine whether it is a good fit for their portfolio.

Investors should always remember that they are not simply buying a stock; they are also becoming a stakeholder of that firm. Therefore, they must do their homework as an investor.

Before an investor buys any stock and spends their hard-earned money, they should identify a few crucial things about a firm to understand whether it fits in their portfolio.

1. Time: Before buying a stock, it is critical for an investor to determine and choose their time horizon. Depending on the financial goals, the investment time horizon might be short, medium, or long term.

•   Short-term investing: A short-term time horizon is defined as any investment that is expected to hold for less than a year. If an investor wants to buy a stock and hold it for less than a year, they should look for solid blue-chip firms that pay dividends. The firms have a strong financial sheet and are less vulnerable to risk.
•   Medium-term investing: A medium-term investment is one that an investor can plan to keep for one to ten years. Quality developing market equities and stocks with a moderate level of risk should be considered for medium-term investing.
•   Long-term investing: Finally, long-term investments are any assets that can be kept for a long period. If something goes wrong, these investments have time to recover and can provide a considerable return.

 

2. Strategy: Before purchasing a stock, an investor should research numerous investment techniques and select the one that best matches their investing style. The three main types of tactics utilised by the most successful investors are listed below:

•   Value investing: Value investing is when an investor buys stocks that are inexpensive compared to their rivals in the hopes of making a profit. It is said that Warren Buffett had used this approach to generate massive riches.
•   Growth investing: Growth investing refers to stock purchases that have outperformed the market in terms of sales and profitability. Growth investors feel that these stocks’ rising tendencies will continue, providing an opportunity to benefit.
•   Income investing: Finally, investors should seek out high-quality stocks that pay out big dividends. These dividends provide revenue that may be spent or reinvested to boost earnings potential.

3. Fundamentals: Every investor should check certain fundamentals before they go ahead and start investing in stocks. The following are some of the most significant ratios to think about:

•   Price-to-earnings ratio: The price-to-earnings ratio compares the stock price to the earnings per share of the firm. For example, if a firm trades at Rs. 20 per share and earns Rs. 1 per share yearly, its P/E ratio is 20, meaning that the share price is 20 times the company’s annual profits.
•   Debt-to-equity ratio: The debt-to-equity ratio is used to calculate how much a firm owes. High debt levels are bad since they indicate bankruptcy.
•   P/B ratio (price-to-book-value ratio): This ratio compares the stock price to the net value of the company’s assets, then divides by the number of outstanding shares.

4. Pattern of shareholders: Investors should look at the ownership pattern before purchasing a stock. Promoters are individuals or organisations with a significant impact on a company. They might own a significant portion of the firm or hold prominent management roles. So, investors should look for firms with large promoter ownership, a large domestic institutional investor holding, and a large foreign institutional investor holding.
5. History of dividends: Dividend stocks are well-known for paying out a portion of their profits to shareholders in the form of dividends. These dividend stocks should be considered by investors following the income investing method. If the investor’s purpose is to create income from their investments, they should research the company’s dividend history before purchasing its stock. Income investors should look at the company’s dividend yield, which is indicated as a percentage, if they want a high level of income compared to the stock’s price.
6. Volatility: On optimistic days, stocks with high volatility will climb swiftly, and on negative days, they will crash like a brick. If you invest in a low-volatility stock that moves slowly and a recent rise reverses, you can cash in your gains before they vanish. Stocks with rapid moves, on the other hand, do not allow you much time to quit the investment, and when a trend reverses, you may lose money.

Before an investor purchases and adds any stock to their portfolio, they must ascertain that they are purchasing the top firms. Stock screeners such as StockEdge can assist an investor in identifying firms that satisfy their investing or trading criteria.

An investor can choose to begin with a small amount of money if they wish. It’s more involved than just picking the appropriate investment (a challenging task in and of itself), and they must be conscious of the limitations of a rookie investor.

An investor needs to conduct some research to establish the minimum deposit requirements and then compare commissions to those offered by other brokers. It’s unlikely that an investor will be able to diversify their portfolio while spending a small amount of money on specific stocks. They may also have to decide on a broker with whom they want to create an account.

What is Earnings Per Share?

EPS or Earnings Per Share is one of the most important financial measures that indicates a company’s profitability. It is a significant variable to determine the share price of a company. It is a financial ratio indicating the amount of profit or loss for the period attributable to each equity share. It is crucial for investors and other people who are involved in the stock market and is frequently used by them to gauge a company’s profitability before buying shares of the company. A high Earning per share indicates that the company is very profitable, and more profit is available for distribution to the shareholders. In short, the higher the Earnings per share, the better the profitability of the company. It can be said that the Earnings per share are a basic yardstick of the profitability of a company that you can use to get an idea of whether the company is safe for the bet.

How is EPS calculated?

EPS Calculation: EPS calculation is very simple and easy. Earnings per share are generally calculated on a quarterly or annual basis.

 Ways of EPS Calculation:

• Basic Earning Per Share (EPS) Calculation:
  It is calculated by dividing the net income of a company by the number of its total outstanding shares.The EPS formula is:

  Basic EPS = (Net income – Dividend on Preference Shares) / Outstanding Shares at End-of-period

  For example, if a company has 5000 outstanding shares and the profit of the company is ₹50,000, then as per Earning per share formula, the earning per share would be:

  ₹50,000 /  5,000 = ₹10/share

  The EPS is ₹10 / share (assuming nil preference dividend).

  The resulting number, i.e., earnings per share of ₹ 10 in our example, can be considered as an indicator of the profitability of a company.

• Weighted Earning Per Share (EPS) Calculation:
  While doing the EPS calculation, you are advised to use the weighted ratio because, over time, the number of outstanding shares can change. Taking only the number of common outstanding shares at the end of the period would distort the outlook of the company by showing a skewed version of earnings. The weighted earnings per share formula is given below: 

  Weighted EPS = (Net income – Dividend on Preference Shares) / Weighted average outstanding shares 

  For instance, let us take the following data to calculate the weighted earnings per share.

Date of Change	No. of Outstanding shares	Weight	Weighted average share
1st April 2021	4,00,000	3/12 = 0.25	1,00,000
1st July 2021	5,00,000	6/12 = 0.50	2,50,000
1st Oct 2021	6,00,000	3/12 = 0.25	1,50,000
Total			5,00,000

Hence, the outstanding weighted average share for the given year = 5,00,000 shares.

To calculate the weighted earnings per share, we will divide the net income of the company by 5,00,000 shares, i.e., outstanding weighted average shares.

• Diluted Earnings Per Share (EPS) Calculation:
  It is computed for calculating the profit/ loss attributable to ordinary equity shareholders of the parent entity and if presented, profit/loss from continuing operations attributable to those equity shareholders.For computing diluted EPS, we have to adjust profit/ loss attributable to ordinary equity shareholders of the parent entity and the weighted average number of shares outstanding, for the effect of all dilutive potential ordinary shares.

  Diluted EPS = (Profit/ loss attributable to ordinary equity shareholders when dilutive potential shares are converted into ordinary shares)/(Weighted average number of equity shares + Weighted average number of dilutive potential ordinary shares)

How can you calculate EPS in MS Excel?

Once you have collected the necessary data, enter the net income, preference dividends, and the number of outstanding common shares into the three adjacent cells, say A3, A4, and A5. Now, in cell A6, input the following formula “=A3-A4” to subtract preference dividends from the net income. After that, in cell A7, input the following formula “=A6/A5” to get the EPS ratio.

 

Types of Earnings Per Share:

The calculation of earnings per share is quite simple. But there are different variations of earnings per share that are in use these days. Each variation tends to represent a different side of EPS. From retained earnings per share to GAAP earnings per share, you need to understand what these represent to make an informed decision about shares.

Because of these variations of earning per share, a share may appear overvalued or undervalued. Let us now understand the different varieties of earnings per share and what each variety represents about the performance of the company.

Normally, there are three broad categories in which earnings per share is divided:

1. Trailing EPS: This variation of earning per share is based on the figures of the previous year.
2. Current EPS: This variation of earning per share is based mostly on the available figures.
3. Forward EPS: This variation of earning per share depends on estimated figures and anticipated future progressions.

There are four types of EPS:

1. GAAP EPS or Reported EPS: This variety of earnings per share is derived from GAAP (Generally Accepted Accounting Principles) 
2. Book Value EPS / Carrying Value EPS: This EPS variation is also known as Carrying value earnings per share. Book Value EPS will enable you to compute the aggregate amount of the company equity in each share (an entity’s net asset value (total assets – total liabilities) on a per-share basis.). It is also helpful in estimating the worth of a share of a company in case the company is to be liquidated. 
3. Retained EPS: It implies that the company is holding the profits instead of apportioning them as dividends to the shareholders. Business owners may choose to use the earnings per share which were retained to pay off their present debts for expansion or may retain it as a reserve to satisfy future requirements. 

   Generally, Retained earnings per share are declared under the head- stockholders equity in the balance sheet.To compute the retained earnings per share, we have to add the net earnings and the net current earnings which were retained and then subtract the total amount of dividend distributed from it. Lastly, divide the remaining amount by the number of total outstanding equity shares.

   Therefore, you can compute the retained EPS calculations using the below formula –

   Retained EPS = ((Net earnings + net current retained earnings) – dividend distributed) / Total number of outstanding  equity shares

   On the other hand, if the amount of retained earnings is negative, subtract it from the net earnings of the subsequent accounting period.

4. Cash EPS: Cash earnings per share is one of the important variations of EPS as it supports you to get a better opinion about the financial standing of the company. It is so because the Cash earning per share shows the accurate amount of the cash that has been earned. Also, it is very difficult to temper the cash EPS variation. 

   For ease of your understanding, Cash EPS can be described asCash EPS = Operating Cash Flow / Total number of diluted shares outstanding

   Understanding the overall EPS variations: Let us understand the above-mentioned variations of Earnings Per Share with the help of a table –

EPS Variations	Calculations
GAAP EPS  or Reported EPS	It is computed as per GAAP (Generally Accepted Accounting Principles).
Pro Forma EPS or Ongoing EPS	It excludes an abnormal one-time profit in the net income.
Retained EPS	It is then computed by dividing the amount of net earnings and current retained earnings after subtracting the dividend paid from the total number of outstanding shares.
Cash EPS	For computing Cash EPS, total operating cash is divided by outstanding diluted shares.
Book Value EPS	For computing the EPS, take the current balance sheet into account.

Importance of Earnings Per Share

To measure the profitability & financial standing of a company, the points mentioned below highlight the importance/ need of earnings per share –

1. It will help you to create more income if you are investing in a company. To elaborate, a higher Earning Per Share shows a beneficial status, which in turn indicates that the entity may enhance its dividend payout over time.
2. It helps you to compare the performance of the various promising companies which helps investors make informed decisions regarding their investment options.
3. With the assistance of Earnings per share investors & other financial methods, you can determine the existing & anticipated value of the stock of the company. Further, EPS enables you to analyze whether the value of the stock price is as per its performance in the market. For instance, you can use the Earnings per share along with the Price Earnings Ratio (P/E) to calculate the same. In the formula of Price Earnings Ratio (P/E), ‘P’ stands for price, and ‘E’ stands for earnings which are calculated with the assistance of the EPS formula.
4. Earning per share not only assists in measuring the current financial performance but also assists in tracking the past performances of the companies. For example, a company with a regularly increasing Earnings Per Share is often recognized to be a dependable investment option. Similarly, a company with weak or irregular Earning Per Share is generally not selected by periodic investors.

Limitations of Earnings Per Share

When you look at the Earnings Per Share to make an investment or to make a trading decision, be aware of some of the possible drawbacks. For instance, a company can handle its Earnings Per Share by buying back its stock, thereby reducing the number of outstanding shares, and as a result, inflating the EPS amount given the same amount of earnings. EPS can also change due to changes in the accounting policy for reporting the earnings. Also, EPS has little to say about whether the stock of a company is under or overvalued because EPS does not take into account the price of the share.

Although EPS is believed to be one of the potent financial tools, you must keep in mind that earning per share has its drawbacks also.

The below list highlights some of the limitations of EPS which you must remember :–

1. When it comes to measuring the ability of a company to pay its debt, cash flow is a very important aspect. However, cash flow is also not recognized in the calculation of EPS, which shows a high earning per share may still not be effective for gauging the solvency of a company.
2. EPS doesn’t take into account the current price of the share of the company.
3. Companies might have used different accounting policies for determining earnings in different financial years. It may have an impact on EPS.

Hence, before you judge a company’s merit as an investment choice, you should also verify other crucial factors. In fact, to gain a good idea of the overall scope, market performance & profitability of a business venture, you should align EPS with the other financial parameters.