Definition
Earnings per share (EPS) is a company’s net profit divided by the number of outstanding shares of its common stock. It serves as an indicator of a company’s profitability, providing a snapshot of how much it earns for each share of stock. Therefore, a higher EPS potentially suggests more value because investors will pay more for a company’s shares if they think the company has higher profits relative to its share price.
Key Takeaways
- Earnings Per Share (EPS) is a financial metric, which indicates a company’s profitability by dividing the net earnings with the total number of outstanding shares. It serves as a key indicator of the company’s economic health and financial performance.
- EPS is a commonly used figure in investment analysis, helping investors and analysts compare companies within the same industry, determine relative value, and understand whether a company’s stock price is overpriced or underpriced.
- The variables influencing EPS can be divided into two main categories: factors related to a company’s operational efficiency (profitability, costs, revenue generation, etc.) and factors related to the company’s capital structure (i.e., the number of outstanding shares). Both can significantly impact the EPS value.
Importance
Earnings Per Share (EPS) is a vital financial metric that investors and businesses use to evaluate a company’s profitability.
It represents the portion of a company’s profit allocated to each outstanding share of common stock, effectively serving as an indicator of a company’s financial health.
The bigger the EPS, the more lucrative the company appears to potential investors, as it suggests that the company is more capable of generating profit.
Consequently, EPS is fundamental to investment decisions as it helps to compare profitability among peer companies within the same sector, assess the potential return on investment, and forecast future earnings.
Explanation
Earnings Per Share, also referred to as EPS, is an essential tool utilized by investors and analysts to evaluate the financial health and profitability of a company on a per share basis. The main purpose of the EPS metric is to provide a standardized way to assess financial performance across different companies and various investment opportunities, by breaking down a company’s earnings in relation to each outstanding share of common stock.
This enables investors to gain a clear picture of a company’s profitability and compare it with other potential investment options. EPS is pivotal in making informed decisions about buying, holding, or selling stocks.
The EPS value is frequently used in investing equations, such as the Price-to-Earnings ratio (P/E ratio), which aids investors in determining the value received for each dollar invested in a company. A higher EPS indicates a more profitable company, which may become a more attractive investment choice, as it suggests a better capacity to generate profits for shareholders.
However, EPS is just one of the metrics to consider as it doesn’t always reflect the complete financial narrative of a company. It is typically used along with other financial ratios and indicators for a more comprehensive evaluation.
Examples of Earnings Per Share
Earnings Per Share (EPS) is a key indicator of a company’s profitability and is calculated as net income minus dividends on preferred stock, divided by the number of outstanding shares. Here are three real-world examples:Apple Inc.: For Q4 of 2021, Apple reported net income of $6 billion. The company does not pay preferred dividends, so there’s no need to subtract anything here. Given that there were roughly
31 billion shares outstanding, the earnings per share (EPS) for Apple in Q4 2021 would be approximately $Microsoft Corporation: For Q4 of 2021, Microsoft reported a net income of $5 billion. Microsoft doesn’t issue preferred shares, so nothing is subtracted. With approximately
51 billion shares outstanding, Microsoft’s earnings per share for Q4 2021 would stand at approximately $Amazon Inc.: Amazon recorded net income of $8 billion for Q2 of
Since Amazon doesn’t have any preferred stock, nothing is subtracted from the net income. Given that the number of shares outstanding is around 504 million, Amazon’s EPS for that quarter would be roughly $Remember that EPS is a simplified calculation and can be affected by stock buybacks, issuance of new shares, and other activities, so it’s important to use it in context when evaluating a company’s profitability.
Earnings Per Share – Frequently Asked Questions
What is Earnings Per Share (EPS)?
Earnings Per Share (EPS) is a financial metric that is part of a company’s profit allocated to each outstanding share of common stock. It is a significant indicator of a company’s profitability.
How is EPS calculated?
Earnings per share is calculated by dividing net income by the number of outstanding shares. For example, if a company’s net income is $10 million and it has 1 million shares outstanding, the EPS would be $10.
Why is EPS important?
Earnings Per Share is an important measurement as it provides investors a means of determining the amount the business earned on their stock share investment. It is used by the market to calculate the profitability of a company comparatively to other companies.
What is a good EPS?
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. However, comparison of EPS between companies can provide value when analyzing and choosing which companies could be potentially profitable.
Can EPS be negative?
Yes, EPS can be negative. A negative EPS can occur when a company has a net loss or it’s earning less than the dividends paid to its shareholders. It’s an indicator of financial troubles within a company.
Related Entrepreneurship Terms
- Dividends
- Net Income
- Outstanding Shares
- Shareholder Equity
- Price-to-Earnings Ratio
Sources for More Information
- Investopedia – Provides a broad range of financial information including definitions, explanations, and articles on finance topics including Earnings Per Share.
- NASDAQ – Provides access to real-time financial market news, stock quotes, and detailed information about financial terms like Earnings Per Share.
- MarketWatch – Offers business news, analysis, and stock market data. Their financial glossary section is a valuable resource to understand terms like Earnings Per Share.
- Moneycontrol – One of India’s leading financial information source and provides analysis and data regarding Earnings Per Share, along with other financial elements.
