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What Is Earnings Per Share (EPS) and Why Is It Important in Stock Investing?

Understanding Earnings Per Share (EPS) is key for anyone who wants to analyze a company’s financial health before investing. EPS is one of the simplest yet most powerful indicators used to measure profitability per share. This article will guide you through the concept, how to calculate it, and why it matters in your investment journey.

What Is Earnings Per Share (EPS)?

EPS stands for Earnings Per Share. It represents the portion of a company’s net profit allocated to each outstanding share of common stock. In simple terms, EPS shows how much money a company earns for every share an investor owns.

How to Calculate EPS

The Basic Formula

The formula is straightforward:

EPS = Net Profit ÷ Total Outstanding Shares

Illustrative Example

Imagine your friend owns a “Bakso Company” listed on the stock exchange with:

• Net Profit (2021): Rp100,000,000
• Total Outstanding Shares: 100

Then EPS = 100,000,000 ÷ 100 = Rp1,000,000 per share. If you own one share, you are entitled to Rp1,000,000 of profit that year.

Why EPS Matters for Investors

EPS is a critical indicator because:

• Profitability Insight: It shows how profitable each share is.
• Growth Signal: Consistently increasing EPS indicates strong business performance.
• Valuation Tool: It’s used alongside ratios like Price-to-Earnings (P/E) to decide whether a stock is overvalued or undervalued.

EPS Growth: The Key to Long-Term Investment

An investor should not only look at the latest EPS figure but also check if it grows consistently year after year. For example, if a company’s EPS grows from Rp400,000 in 2016 to Rp1,000,000 in 2021, it signals strong performance and sustainable growth.

“A company with consistently growing EPS is often a company worth holding for the long run.”

Real-World Case: Bank BCA

From 2009 to 2021, Bank BCA’s EPS rose from Rp55 per share to Rp255 per share. During the same period, its stock price multiplied more than 7 times. This proves the principle: stock prices follow the company’s fundamentals.

Limitations of EPS

Despite its usefulness, EPS has limitations:

• Not suitable for cyclical companies where profits fluctuate heavily.
• EPS doesn’t account for debt levels or cash flow quality.

Therefore, EPS should be combined with other financial indicators for a comprehensive analysis.

Conclusion

EPS is one of the simplest yet most powerful tools to evaluate a company’s financial health. By monitoring EPS growth over time, investors can identify solid companies with long-term potential. Remember, don’t just look at the current number — track the trend.

If you found this explanation useful, feel free to share it with others, drop your thoughts in the comments, and stay tuned for more investing insights.

Labels: Finance

References

• Video: Apa itu Laba Per Saham (Earnings Per Share)
• Channel: Saham dari Nol
• Source: https://www.youtube.com/watch?v=4FPYMs-2EII