What is Earnings Per Share (EPS)?
Earnings per share (EPS) is a financial metric that measures the profitability of a company and indicates the portion of the company's earnings allocated to each outstanding share of its common stock. It is calculated by dividing the company's net income by the number of outstanding shares. EPS is an important indicator for investors as it helps them assess a company's profitability on a per-share basis and compare it with other companies in the same industry. Higher EPS generally indicates stronger profitability, while a declining EPS may signal potential financial challenges.
Key takeaways
- Earnings per share (EPS) measures a company's profitability on a per-share basis.
- It is calculated by dividing the company's net income by the number of outstanding shares.
- EPS helps investors assess a company's financial performance and compare it with other companies.
Understanding Earnings Per Share (EPS)
Earnings per share is a financial ratio that allows investors to evaluate a company's profitability on a per-share basis. It helps answer the question, "How much money is each share of the company's stock making?"
To calculate EPS, we need two pieces of information: the company's net income and the number of outstanding shares. Net income represents the company's total profits after deducting expenses and taxes, while outstanding shares refer to the number of shares held by investors.
The formula for calculating EPS is straightforward: divide the net income by the number of outstanding shares. For example, if a company has a net income of £1 million and 1 million outstanding shares, the EPS would be £1 (£1 million ÷ 1 million).
Real world example of Earnings Per Share (EPS)
Let's say you're considering investing in two different companies, Company A and Company B, operating in the same industry. Company A has a net income of £10 million and 5 million outstanding shares, while Company B has a net income of £15 million and 10 million outstanding shares.
Calculating the EPS for Company A: £10 million net income ÷ 5 million outstanding shares = £2 EPS
Calculating the EPS for Company B: £15 million net income ÷ 10 million outstanding shares = £1.50 EPS
Based on EPS, Company A appears more profitable on a per-share basis, as it has a higher EPS compared to Company B. This information can help you make a more informed investment decision by considering the relative profitability of the two companies.
Earnings Per Share (EPS) and investing
Earnings per share (EPS) is a financial metric that measures a company's profitability on a per-share basis. It is calculated by dividing the net income by the number of outstanding shares. EPS helps investors assess a company's financial performance and compare it with others in the industry. A higher EPS generally indicates stronger profitability, while a declining EPS may raise concerns. By understanding EPS and considering it alongside other financial indicators, investors can gain insights into a company's profitability and make more informed investment decisions.