Install our Earnings Per Share (EPS) is a fundamental metric used in finance and investing to evaluate a company's profitability. It represents the amount of earnings generated by each outstanding share of common stock.
What does EPS measure?
EPS measures the net income available to shareholders after deducting all expenses, taxes, and dividends. In other words, it calculates how much profit is left over for the shareholders after all costs have been accounted for.
How to calculate EPS?
- The formula to calculate EPS is: EPS = Net Income / Total Number of Outstanding Shares
- Numerator: Net Income represents the total earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Denominator: Total Number of Outstanding Shares represents the total number of common shares issued by the company
For example, if a company has a net income of $100 million and 1 million outstanding shares, its EPS would be $100 per share.
Why is EPS important?
EPS is crucial for investors as it provides an indication of a company's ability to generate cash flow and distribute dividends. A higher EPS indicates better profitability and a stronger financial position. However, EPS can also be influenced by various factors such as accounting practices, industry trends, and market conditions.
Interpreting EPS
- A high EPS usually indicates a healthy company with strong financial performance
- A low EPS may indicate a struggling company or an industry experiencing difficulties
EPS is often used in conjunction with other metrics such as revenue growth, return on equity (ROE), and price-to-earnings ratio (P/E) to get a comprehensive view of a company's financial health.