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EPS, Earnings Per Share

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EPS stands for earnings per share, which is a company’s net income divided by the number of common shares outstanding. It is a key metric used to measure a company’s profitability and to compare different companies’ performance.

Formula:

EPS = Net Income / Number of Common Shares Outstanding

Key factors affecting EPS:

  • Company’s profitability: Companies with higher profitability will have higher EPS.
  • Number of common shares outstanding: Companies with a larger number of shares will have lower EPS.
  • Dividends: Companies that pay dividends will reduce their EPS by the amount of the dividend paid per share.
  • Accounting methods: Different accounting methods can affect EPS. For example, depreciation methods can affect earnings per share.
  • Industry norms: Different industries have different average EPS levels.

Uses of EPS:

  • Company comparison: Investors compare EPS of different companies to assess their relative performance.
  • Stock valuation: EPS is used as a factor in determining the price of a company’s stock.
  • Forecasting: Investors use EPS projections to forecast future company performance.

Important notes:

  • EPS is a non-cash flow metric, so it does not include changes in working capital or long-term investments.
  • EPS can be adjusted for certain items, such as extraordinary items or non-operating income.
  • It is important to compare EPS figures for companies in the same industry or with similar business models.

Additional metrics:

  • Diluted EPS: This is EPS adjusted for the dilutive effect of convertible securities.
  • Adjusted EPS: This is EPS excluding certain items, such as extraordinary items or non-operating income.
  • EPS growth: This is the percentage change in EPS between two periods.

FAQs

  1. What is a good EPS for a stock?

    A good EPS varies by industry, but higher EPS generally indicates better profitability.

  2. Is a higher or lower EPS better?

    A higher EPS is typically better, as it shows the company is earning more profit per share.

  3. What does EPS tell you?

    EPS shows how much profit a company earns for each outstanding share of stock, reflecting its profitability.

  4. What is the EPS formula?

    EPS = (Net Income – Dividends on Preferred Stock) รท Average Outstanding Shares.

  5. Is an increase in EPS good or bad?

    An increase in EPS is generally considered good, as it indicates growing profitability.

Disclaimer

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