In any business, earning per share (EPS) is one of the most important metrics to understand and track. EPS tells you how much profit a company makes for every share of stock it has outstanding.
In this guide, we’ll break down everything you need to know about EPS, including what it is, how to calculate it, and why it matters. We’ll also look at examples to see how it works in practice. By the end of this guide, you’ll be an expert on EPS and will be able to use it to make informed decisions about your investments.
What is EPS?
Earning per share (EPS) is a financial ratio that tells you how much profit a company generates for each share of stock it has outstanding. It’s calculated by dividing net income by the number of shares outstanding.
An EPS Example
For example, let’s say Company XYZ has 100,000 shares outstanding and generated $10 million in net income last year. This means its EPS would be $10 million / 100,000, or $0.10.
This metric is important because it allows investors to compare different companies on a level playing field. For example, if Company XYZ has an EPS of $0.10 and Company ABC has an EPS of $1.00, then ABC is clearly generating more profit per share than XYZ.
How to calculate EPS
There are two key ways to calculate EPS: basic EPS and diluted EPS.
Basic EPS only includes the shares that are actually outstanding. So, if our Company XYZ from earlier had 100,000 shares outstanding and generated $10 million in net income last year, its basic EPS would be $0.10.
Diluted EPS takes into account all of the potential shares that could be outstanding. This includes things like stock options, warrants, and convertible debt.
For example, let’s say Company XYZ has 100,000 shares outstanding and also has 10,000 stock options that could be exercised at $10 per share. Assuming that all of these options will be exercised, the company will have 110,000 shares outstanding.
The diluted EPS would be $10 million / 110,000, or $0.091.
As you can see, the diluted EPS is usually lower than the basic EPS because it includes more shares in the denominator.
3 Reasons why EPS is important?
1. It is a measure of a company’s profit that is allocated to each outstanding share of common stock.
2. EPS serves as an indicator of a company’s profitability and is often used in conjunction with other measures, such as price-to-earnings ratio (P/E ratio), to determine whether a stock is undervalued or overvalued.
3. It can be used to determine whether a stock is undervalued or overvalued.
Examples of why EPS matters
There are a few reasons why EPS is important for investors. First, it allows you to compare different companies on a level playing field. Second, it’s a good indicator of a company’s profitability. And third, it can be used to value a company’s stock.
When you’re comparing two companies, you want to make sure you’re comparing apples to apples. EPS is a good way to do this because it tells you how much profit each company generates for each share of stock.
For example, let’s say Company XYZ has an EPS of $0.10 and Company ABC has an EPS of $1.00. This means that ABC generates ten times the profit per share as XYZ.
EPS is also a good indicator of a company’s profitability. This is because EPS tells you how much net income the company generates for each share of stock. The higher the EPS, the more profitable the company is.
Finally, EPS can be used to value a company’s stock. There are a few different ways to do this, but one of the most common is to use the price-to-earnings ratio (P/E ratio).
The P/E ratio is calculated by dividing the stock price by the EPS. For example, if Company XYZ has a stock price of $10 and an EPS of $0.10, then its P/E ratio would be 10 / 0.1, or 100.
Generally speaking, a higher P/E ratio means that investors are willing to pay more for each dollar of earnings. So, if Company XYZ has a P/E ratio of 100 and Company ABC has a P/E ratio of 10, then investors are willing to pay ten times more for each dollar of earnings for XYZ than they are for ABC.
Example EPS & PE Ratio Chart of Apple Inc.
How to use EPS in your investment decisions
Now that you know what EPS is and why it matters, you can start using it to make informed investment decisions.
If you’re looking for a profitable company, then you want to look for a company with a high EPS. This means that the company is generating a lot of profit for each share of stock.
You can also use EPS to value a company’s stock.
The P/E ratio is a good way to do this. Generally speaking, a higher P/E ratio means that the stock is more expensive. So, if you’re looking for a bargain, then you want to find a company with a low P/E ratio.
EPS can be a useful tool for investors, but it’s important to remember that it’s just one piece of the puzzle.
The bottom line
EPS is an important metric for investors to understand. It allows you to compare different companies on a level playing field and value a company’s stock. However, it’s important to remember that EPS is just one piece of the puzzle. Many factors go into whether or not a stock is a good investment, and EPS is just one of them.
I hope this helps you to understand EPS the most crucial fundamental measure of a company. If you get tips from your Financial advisor, postman, workmate, or pals on Facebook, now you can simply look at the EPS, and decide for yourself if the company is worth researching.
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