Present earnings and the future prospectus as for the growth and expansion of the company are the fundamental issues that are relevant when one talks about income per share. A share is like the brick. Its strength is important to the strength of the overall structure. Trading in a particular share is, technically, the day to day evaluation of the company's performance. It indicates the trust or otherwise of the buyers and sellers of a particular stock.



Prospective investors get lots of material to do research and analysis on a particular stock. Companies publish earning reports on a quarterly basis about the goings-on within the company. This detailed information, is normally sufficient for an intelligent investor to study the issues and come to a decision. The report also contains projections as to the expected future earnings of the company. The key issues with which the investor is concerned are the earning report, the net income of the company and the earnings per share. With this information, the existing shareholder will understand where his shares stand. A new investor looks out with hope the ability of the company to deliver the goods.

Income per share can be understood by the following equations:

A company's earnings per share are equal to the company's net income over the total number of shares outstanding.

Earnings per Share = (Net Income - Dividends on Preferred Stock) / (Average Outstanding Shares)

The P/E ratio (price-to-earnings ratio) commonly referred to as the multiple and is equal to the stock price over the company's annual earnings per share.

P/E Ratio = Current Stock Price / Annual Earnings per Share

Conversely, the F P/E ratio (forward price-to-earnings ratio) refers to the current stock price over a company's estimated annual earnings per share for the coming years.

F P/E Ratio = Current Stock Price / Forecasted Annual Earnings per Share

Income per share does not relate to what you get of the share at present, not based on what the company is making today, but what it is expected to deliver tomorrow. The PE ratio is the authentic scale that indicates how much an investor is willing to pay for company's current earnings. Obviously, the higher the PE ratio is, the more expensive the stock would be! The stocks are not traded on their present earnings alone, but on their potential growth.

Income per share depends upon the types of shares that one intends to trade. For example, value stocks are traded at low PE ratios. Their earning per share is expected to grow at a much slower rate, less than ten percent annually. But the growth is consistent. Research on these shares indicates that the value stocks have out-performed the growth stocks over the last ten years. Slow and steady does win the race!

Growth Stocks trade at high PE ratios because their identification is on a different footing as for their earnings. Their future earning capacity is given credentials than the present status. The confidence of the investors depends upon many factors. The important ones among them are the growth prospectus for the company's product line, the composition of the Board of Directors, etc. Lower than expected earnings for any reasons, may see the share prices drop sharply. Normally, one should never buy a share that trades above twice its growth rate.

Do you aim for a sharp increase in income per share? Then trading in Stocks with Accelerated Revenue Growth is the option. Here the position is-- the company's earnings are expected to grow faster, so you credit them with a very high PE ratio. But risk is round the corner. You earn on a massive scale if the growth rate continues to accelerate.

Conversely, you need to prepare yourself for huge losses, should the business activities of the company go haywire!

Income per share is closely linked to the overall present health and the future growth prospectus of the company. This is the fundamental issue. Other factors affecting the share prices are variable.