Introduction
Hey there! If you’re a recent graduate who’s just received your first paycheck, congratulations! This is an exciting time filled with new opportunities, but it can also feel a little overwhelming, especially when it comes to investing. One term you might have heard a lot about is Earnings Per Share (EPS), but what is it exactly, and how does it impact your investment decisions?
In this article, we’ll delve into 5 common mistakes that beginner investors make with EPS and how to avoid them. By the end, you’ll have a better understanding of EPS and practical tricks to help you invest wisely, reducing that financial anxiety while building healthy money habits.
What is Earnings Per Share (EPS)?
Before diving into the mistakes, let’s simplify what EPS really means. Think of EPS as a report card for a company, showing how much money it makes for each share of stock. More earnings usually mean a healthier company, but it’s essential to look beyond just the numbers.
With that in mind, let’s jump into the common pitfalls.
Section 1: Focusing Solely on EPS Growth
Mistake: One common mistake investors make is assuming that higher EPS growth means a company is a great investment. While growth is important, it’s not the whole picture.
Avoid It: Always look at the context behind the numbers. A tiny company may show impressive EPS growth, but it could be because they started from a very low base. Compare the growth against industry standards and consider other factors like revenue and market trends.
Section 2: Ignoring the Impact of Share Buybacks
Mistake: Many new investors overlook how share buybacks can inflate EPS. When a company buys back its shares, the earnings are divided among fewer shares, resulting in a seemingly higher EPS.
Avoid It: Check the company’s recent actions. Are they buying back shares? If so, look at the reasons behind it. A healthy balance of investments in growth and share buybacks is ideal. Always evaluate EPS alongside the company’s broader strategy.
Section 3: Neglecting the Differences Between GAAP and Non-GAAP EPS
Mistake: Not all EPS numbers are created equal! Some companies provide Non-GAAP EPS, which might exclude one-time expenses or income. This can make the company look better than it actually is.
Avoid It: Familiarize yourself with the terms. GAAP (Generally Accepted Accounting Principles) is the standard way of measuring a company’s financial health, while Non-GAAP can be a cherry-picked number. Always compare both versions and ask why the company is using Non-GAAP measures.
Section 4: Forgetting About Future Projections
Mistake: EPS is often a historical measure, meaning it reflects past performance. Relying solely on it without considering future projections is a common trap.
Avoid It: Look for analyst forecasts and projections of future EPS. Review what’s driving these forecasts—like new product launches or market expansions. Factor this in to get a better sense of where the company is headed.
Section 5: Not Considering the Overall Financial Picture
Mistake: Lastly, some investors get tunnel vision on EPS and forget to consider the overall financial health of the company. A high EPS doesn’t necessarily mean the company is doing well.
Avoid It: Take a holistic approach. Look at the company’s debt levels, cash flow, and profit margins. An impressive EPS might still come from a company struggling with financial instability. A balanced perspective will serve you well.
Conclusion & Call to Action
So there you have it! By avoiding these common mistakes, you’ll be in a better position to make informed investment decisions guided by EPS. Remember the key takeaways:
- Don’t focus solely on EPS growth.
- Be wary of share buybacks that inflate EPS.
- Understand the differences between GAAP and Non-GAAP EPS.
- Look into future EPS projections.
- Assess the company’s overall financial health.
Investing can seem daunting, but take a deep breath—you’ve got this! As a first step, try researching a company that interests you and check out its EPS—along with other metrics. The more you practice, the more confident you’ll become in your financial decisions.
Happy investing, and here’s to building a bright financial future!
