Expert: Steve Hach - 9/11/2011

Question
QUESTION: Is EPS the amount that will be paid out as a dividend as an "earning per each share", or is EPS already self adjusted in the stocks price according the theory (something market hypothesis)?

I hope that makes sense. I'm trying to figure out what EPS means for an investor.

Will the expected EPS cause the stocks price to rise in value, and that will subsequently be the EPS.

I tried reading investopedia and wikipedia, but I still couldn't understand for some reason. Thanks!

ANSWER: Hi Mike,

sorry for the delay, I was in an accident and have been out of work for a while.

EPS means earnings per share.

It is the company earnings divided by the number of shares once preferred share dividends--if any--are taken out.

One would expect that as a company makes more money, the EPS will go up and thus the stock price will rise--and vice versa.

It is NOT a dividend, it is merely a gauge of the health of the company.  

Not all companies pay dividends despite making tons of cash--Apple would be a good example of this.  They have huge earnings, but they sit on the cash and do not send it out to shareholders.

EPS allows you to figure out if the stock is trading at a good price or bad, when considered with all of the other financials.

EPS would also allow you to compare one stock to another, like if you wanted to see if Apple of Dell was a better buy you could compare their EPS and see who was making more money.  But, this is tricky because companies can play accounting games to generate high EPS even though they may have issues with their business.

Sorry again for the delay.

best,

Steve

---------- FOLLOW-UP ----------

QUESTION: Thank you. I think it mostly makes sense now, I had to ask a follow up though. So would share price always already be adjusted for the projected EPS? Or, would it jump on the day that the company released their earnings?

On other words, if I saw a stock trading at $10, and the EPS was a $1 per share, would it's EPS already be included, or could I possible expect that this stock may jump to $11 whenever earnings are released.

On a side note, for the most part, are stocks prices always adjusted in advance to future expectations?

Thanks, a lot, I appreciate it. Sorry about your accident!

Answer
The shares are always priced according to what the market thinks they are worth.
Announced earnings may lead to a rally or a fall in the stock's price depending on how the market views them.
Just because earnings increase does NOT mean that shares will go up--and vice versa.
The share price is NOT solely based on EPS.
Some firms trade for more than they have in earnings--remember the internet bubble?  
Many of those firms had ZERO earnings yet they were trading for big bucks.
During the recent market crash in 208-2009 some stocks were trading for LESS than they were worth when you added up their earnings and all of their assets.
The final stock buy out price of one of the investment banks that crashed and burned during the market crash was less than the actual value of its own building in Manhattan.
There is this idea out there that the market is totally rational and efficient and that things like EPS will drive prices but there are many more factor at play.