Earnings Per Share (EPS) is an important metric in finance to evaluate a company's profitability. Here we'll explore the meaning of EPS, what it tells us, the formula used to calculate it, and why it might be useful.
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EPS (Earnings Per Share) Meaning
EPS stands for Earnings Per Share. This is a ratio that indicates the profit per single share of a company's common stock. Earnings here means net income minus dividends on preferred stock, and net income is revenue minus expenses.
EPS provides a single number by which to compare the profitability of multiple companies. All else equal, a higher EPS number means more profitable. A change in EPS over time also tells us a company is becoming more or less profitable. A company with a positive EPS growth rate may be a sign of future growth potential.
For example, at the time of writing, Apple has an EPS of 6.11 and Microsoft has an EPS of 9.29.
EPS is arguably most useful in the calculation of the Price To Earnings or P/E ratio, wherein the “E” is EPS.
EPS can be used in conjunction with other metrics to evaluate the financial health of a company, but note that Earnings Per Share alone doesn't tell us the full story. Number of shares outstanding affects the EPS ratio, and two companies aren't likely to have the same number of shares. EPS can also be manipulated with something like share buybacks, which artificially inflate EPS by decreasing the number of shares outstanding. It's common to report a normalized EPS that adjusts for these things.
EPS also doesn't consider a company's debt, which is obviously highly relevant to an overall picture of financial standing. A company with a high EPS ratio can very easily also have high debt. As such, it's important to consider EPS alongside other financial metrics such as debt-to-equity, return on equity, and return on assets to get a more comprehensive understanding of a company's financial health.
EPS can also be affected by the accounting methods used by a company for things like depreciation, inventory and taxes.
Lastly, EPS can be affected by one-time events such as mergers, acquisitions, and write-offs, which can make it challenging, if not impossible, to compare EPS from one time period to another. Things like revenue and operating income are less affected by these one-time events.
Because of all this, EPS is much more useful on an absolute basis than on a relative basis.
EPS Formula – How To Calculate
We can calculate EPS using the following formula:
EPS = (Net Income - Preferred Dividends) / Common Shares Outstanding
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