Earnings per share (EPS) is a financial ratio that measures the profit generated by a company for each outstanding share of its common stock. It is calculated by dividing the company’s net income (profit after taxes) by the number of outstanding shares of common stock. The resulting number is the amount of profit that each share represents.
EPS is a commonly used metric to determine a company’s profitability, as it gives investors an idea of how much profit the company is generating per share. It is also used to determine a company’s valuation, as it can be used to calculate the price-to-earnings (P/E) ratio, which compares a company’s stock price to its EPS. The higher the P/E ratio, the more expensive the stock is considered to be relative to its earnings.
EPS is also used as a way to compare the profitability of companies within the same industry. Companies with higher EPS are considered more profitable than those with lower EPS. It’s worth noting that EPS can also be adjusted for certain items such as dilution, stock buybacks, or any other non-recurring items, which results in diluted earnings per share or adjusted EPS.
EPS can also be reported in a basic or diluted form. Basic EPS is calculated using the number of common shares outstanding during the period, while diluted EPS takes into account the number of shares that would be outstanding if all convertible securities (such as options and warrants) were exercised. Diluted EPS gives a more realistic view of a company’s profitability by taking into account the potential dilution of shares from outstanding options and warrants.
It’s worth mentioning that EPS alone is not a perfect indicator of a company’s performance, and should be used in conjunction with other financial measures. For instance, a company may be generating a high EPS, but the growth in EPS may be slowing down, or the company may be generating EPS by cutting costs and not growing the business.
In summary, Earnings per Share (EPS) is a financial ratio that shows how much profit a company generates for each outstanding share of its common stock, it is widely used to evaluate a company’s profitability, to compare it to its peers and to evaluate the company’s valuation by comparing it with its stock price (P/E ratio). It’s important to understand that EPS should be used along with other financial measures and it may be affected by non-recurring items.« Back to Financial Terms Index