EPS (Earnings Per Share) Definition

EPS is a measure used to identify the profitability of a company.

EPS (Earnings per Share) is a fundamental measure of how profitable a company may be, it is the portion of a company’s profit that may be assigned to each outstanding share. The EPS is typically reported on an annual or quarterly basis and there are many variations where the formula being used may vary although in this post the basic EPS will be used.

The formula to determine EPS of a company is derived as;
(Net Income minus Preferred Dividends) divided by Average Number of Shares

And so, we take the example of Company X who report a net income of £30 million and pay out a total of £5 million in dividend. They have 15 million shares outstanding in the first and 18 million in the second half of the quarter. Using this information, we are than able to calculate the EPS via the following;
(30m – 5m) / 16.5m
Giving Company X an EPS value of £1.52

A high EPS value signifies a company has money available to reinvest in its business or distribute as dividend payment to its shareholders acting as a good sign for investors. A low EPS value can mean the company is not as profitable or even losing money at times. Being said the EPS used alone and without context is not enough. To help justify the EPS value further one could compare it against similar companies i.e. within the same industry or against the market it is in. Comparing a company's EPS value against its historical EPS values can also be especially valuable information. Using the EPS we are also able to form the PE ratio where the price is divided by the earnings per share to help value a company.

The EPS acts as an excellent complimentary tool that should certain be used with other metrics when evaluating a company

You may also be interested in: