What is earnings per share (EPS)?
Earnings Per Share (EPS) is a common metric that evaluates how profitable a company is for its shareholders.
It is calculated by dividing a company’s profit by the number of issued common shares of stock.
For example, a company that made a profit of $5 million in one year and has only one million shares outstanding has an Earnings Per Share of $5.
Both businesses and investors use EPS to determine the financial health of a company. Generally, companies with higher EPS ratios are more successful and provide better returns for their shareholders.
Profit—For the purposes of this calculation, a company’s profit is its net income—revenue minus expenses.
Shares Outstanding—The number of shares a stock a company has out on the market.
Assume the following is true of Company ABC:
- Income: $6 million
- Expenses: $1.5 million
- Shares Outstanding: 2 million
Use simple subtraction to determine the Net Income for Company ABC:
- Profit = $6 million – $1.5 million = $4,500,000
Use simple division to determine the Earnings Per Share for Company ABC:
- EPS = $4,500,000 / 2,000,000 shares = $2.25
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How is it used?
Financial analysts look at trends in a company’s EPS to see what direction the business is taking. If the EPS increases over time, it indicates a strong and growing enterprise.
If it declines over time, it may mean the company is not innovating new products, is losing its hold on the market, or has had to continuously issue and sell new shares to raise money.
Like all financial metrics, the EPS ratio is part of a larger picture and should be considered alongside other measures of financial standing.
- The company behind the most expensive stock in the world, Berkshire Hathaway, had an EPS of $14,656 for the 2015 fiscal year.