A fundamental analyst has to go through hundreds of numbers when analyzing the company. Each of those numbers has a story that explains the company’s state. However, two metrics particularly highlight the company’s success in running the business and earning profit for the benefit of the shareholders. The two metrics are Revenue per share and Earnings per Share (EPS). Let’s understand what these numbers are telling the investors.
Understanding Revenue per Share (RPS) and Earnings per Share (EPS)
Revenue
Generally, it is the income earned by normal business operations, including discounts and deductions for returned merchandise. In the income statement, revenue is also known as “sales.”
You can also see the term “Income” in financial statements and investors use both income and revenue terms most often. Both terms are essential indicators to identify financial health, but we cannot use them interchangeably. Here are the differences between revenue and income.
Differences between Revenue and Income
| Revenue | Income |
| Known also as “sales” | Known also as “net income” |
| It is the income a company generates before any expenses are excluded. | It is calculated by subtracting the expenses such as depreciation, taxes, and others from the top line. |
| It demonstrates how effective a company is at generating sales and revenue | It describes how efficient a company is with its spending and managing its operating costs. |
| It refers to the top line | It refers to the bottom line |
Revenue per Share (RPS)
Investors and analysts often call Revenue per Share as “Sales per Share”. Both terms are used interchangeably. Revenue per share represents a company’s annual revenue to its average number of outstanding shares for a particular year. The higher ratio indicates that the company has made good use of its resources to generate sales.
For example, if a company generates 50 million in revenues and has 10 million in shares outstanding, the RPS is $5. It means the company generates $5 in sales for each share outstanding.
The higher the revenue per share (RPS), the more revenue each share can have and the better a company is performing.
What does RPS tell investors?
Revenue per Share (RPS) is a metric that measures how productive a company is per unit of shareholder ownership. Although earnings per share (EPS) is an important driver of stock prices, many analysts use revenue per share to check a company’s valuation. However, it’s vital to remember that revenues are often subject to manipulation, accounting revisions, and restatements.
Earning per share (EPS)
Earnings per share (EPS) is a measure of a company’s financial health. It refers to the percentage of a company’s earnings—or profit—given to each share of stock.
Earnings per share is the revenue remaining for shareholders divided by the number of outstanding shares. Earnings are a company’s revenue minus operating expenses. Investors consider a company to be more profitable if its earnings per share (EPS) is high.
What does EPS tell investors?
Typically, the fundamental analyst will start analyzing the company by looking into the company’s revenue. However, analysts will look at the current revenue and compare the current revenue number with the past revenue numbers. If the current revenue is higher than the previous revenue, and there is an upward trend, the analysts will see it as a positive sign and vice versa.
Like analyzing the revenue, analysts also compare EPS with the previous numbers. If the current EPS number is higher than the previous numbers, and there is an increasing trend in the EPS, it indicates that the company has a positive sign and vice versa.
Besides, investors and analysts like to see the fast-growing EPS instead of revenue. This is because it shows that the company is becoming more efficient in running the business. The more money left after expenses and taxes, the more profit stockholders make.
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