What is EPS (Earnings per Share)?

EPS(Earnings Per Share) is a key metric used to evaluate a company’s profitability on a per-share basis.

EPS shows how much profit is allocated to each outstanding share of common stock.

How is EPS calculated?

The basic formula for calculating EPS is:

EPS = (Net Income – Dividends on Preferred Stocks) ÷ (Average Outstanding Shares)

For example,

if a company has

Net income of $1 million, No preferred dividends, and 500,000 outstanding shares

Based on this, EPS would be $2 per share

Why is EPS important?

Profitability: It helps investors gauge how profitable a company is on a per-share basis

Comparing stocks: Investors can compare the EPS of different companies to identify which one is generating more profit for each share


How is EPS used with other ratios?

Price-to-Earnings (P/E) ratio: EPS is commonly used with the P/E ratio to assess whether a stock is over or undervalued or fairly valued

Return on Equity (RoE): EPS complements RoE to show how well the company generates profit using shareholder’s equity

Conclusion:

Understanding EPS is essential before investing in stocks because it helps assess a company’s profitability and valuation, especially when combined with other key financial ratios.

Hope you find this content helpful in making your analysis.

All the best

God Bless!