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Understanding Difference Between Cash EPS and EPS
Cash EPS and EPS are two important indicators when trading in shares. Analysts and investors alike examine these key fundamental parameters, while trading in stocks.
EPS is also known as earnings per share (EPS) and an important thing for arriving at a figure called the price to earnings multiple, which we shall understand in subsequent analysis.
EPS
Earnings per share is derived by getting the net profit or net income by the number of outstanding shares. Let's say a company A which has an outstanding shares of 200,000 or 2 lakh shares.
If the company reports a net profit of Rs 2.5 million, then the EPS would be = Rs 25,00,000/200000 = Rs 12.5. As you can see the EPS works out to Rs 12.5.
How is cash EPS determine?
The cash EPS is also an important indicator as it takes into account the cash flows. The cash EPS is arrived by the following formula:
Cash EPS = Operating Cash Flow/Number of Outstanding Shares
Let's assume that a company reports an operating cash flow of Rs 10,00,000 or 1 million. If the total number of outstanding shares are 100,000 or one lakh then we need to divide the same using the same formula as mentioned above.
The cash EPS in this case works out to Rs 10.
Why Cash EPS and EPS Are Important?
Both cash EPS and EPS are two very important terms in the case of fundamental analysis. EPS is used to determine the price earnings ratio to see if a stock is over or undervalued in comparison to peers.
For example, if the EPS of a stock A is say Rs 25 and the stock is quoting at Rs 100, we say the stock is quoting at a price to earnings multiple of 4 times.
If another stock B is quoting at a price to earnings multiple of say 6 times, then we say that Stock A is cheaper then stock B in terms of price to earnings multiples.
It all depends on the EPS to determine the price to earnings multiple of a stock.
Therefore it is important to study the EPS and Cash EPS for a fundamental understanding of a stock.
Conclusion
If you are planning to invest in stocks do not forget to check the two ratios that we have given above. Apart from these the book value and the price to book value also assume significance.
All of them are used in fundamental analysis of a stock.
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