What is EPS?

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability

The higher a company's EPS, the more profitable it is considered to be.

KEY TAKEAWAYS

Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding.

EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.

A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.

EPS can be arrived at in several forms, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

How Is EPS Used?

Earnings per share is one of the most important metrics employed when determining a firm's profitability on an absolute basis. It is also a major component of calculating the price-to-earnings (P/E) valuation ratio, where the E in P/E refers to EPS. By dividing a company's share price by its earnings per share, an investor can see the value of a stock in terms of how much the market is willing to pay for each dollar of earnings.

EPS is one of the many indicators you could use to pick stocks. If you have an interest in stock trading or investing, your next step is to choose a broker that works for your investment style.

Comparing EPS in absolute terms may not have much meaning to investors because ordinary shareholders do not have direct access to the earnings. Instead, investors will compare EPS with the share price of the stock to determine the value of earnings and how investors feel about future growth.

What is a good EPS?

What counts as a “good” EPS will depend on factors such as the recent performance of the company, the performance of its competitors, and the expectations of the analysts who follow the stock. Sometimes, a company might report growing EPS, but the stock might decline in price if analysts were expecting an even higher number.

What are some limitations of EPS?

When looking at EPS to make an investment or trading decision, be aware of some possible drawbacks. For instance, a company can game its EPS by buying back stock, reducing the number of shares outstanding, and inflating the EPS number given the same level of earnings. Changes to accounting policy for reporting earnings can also change EPS. EPS also does not take into account the price of the share, so it has little to say about whether a company's stock is over- or undervalued.