What is Earnings per Share (EPS)?

EPS is calculated by dividing the net income of a company by the number of outstanding shares of common stock. The formula for calculating EPS is:

EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares

Where:

• Net Income = the total profit earned by the company
• Preferred Dividends = any dividends paid to preferred shareholders
• Average Outstanding Shares = the average number of shares outstanding during the reporting period

EPS is a key metric that is widely used by investors to assess a company’s profitability and financial health. It provides investors with valuable insights into the amount of profit that a company is generating on a per-share basis.

Investors can use EPS to evaluate the performance of a company over time, as well as to compare the financial performance of different companies. For example, if two companies have similar revenues, but one has a higher EPS than the other, it suggests that the first company is more profitable on a per-share basis.

EPS is also a crucial component of fundamental analysis, which involves evaluating the financial performance of a company to determine its intrinsic value. Investors can use EPS to calculate a company’s price-to-earnings (P/E) ratio, which is a commonly used valuation metric that compares the current market price of a stock to its EPS.

While EPS is a useful metric for evaluating the financial health of a company, it should not be used in isolation. There are many factors that can impact a company’s financial performance, including changes in the market, economic conditions, and company-specific factors.

Additionally, EPS can be manipulated by companies through accounting practices, such as manipulating expenses or using aggressive revenue recognition policies. Therefore, investors should consider a wide range of financial and non-financial factors when evaluating the potential of an investment.