If you’re diving into investing, or even just watching financial news, you’ve probably heard the term “Earnings Per Share” or EPS. But what does it really mean—and why do investors treat it like gold? Let’s break it down, step by step, and make sense of how it affects your money.
A few years ago, I bought stock in a company that looked promising—new product launches, aggressive marketing, and media buzz. But when the earnings report dropped, the EPS was lower than expected. Guess what? The stock price plummeted the next morning. That’s when I realized that EPS isn’t just a number. It’s a reflection of a company’s health.
EPS, or Earnings Per Share, is a financial metric that helps investors understand how profitable a company is—on a per-share basis. It tells you how much money a company is making for each share of stock.
In this article, we’ll walk through exactly what EPS is, how it’s calculated, and why it’s so critical for investors, analysts, and even CEOs.
What is Earnings Per Share (EPS)?
The Simple Definition
At its core, EPS is the portion of a company’s profit that is allocated to each outstanding share of common stock. Think of it as the earnings pie—how big is your slice?
📘 EPS Formula:
EPS = (Net Income − Preferred Dividends) / Weighted Average Shares Outstanding
If you’re holding 100 shares of a company with a high EPS, that’s good news—it usually means the company is making more money per share, and your investment could grow in value.
Why EPS Is a Big Deal in Financial Analysis
EPS is a go-to metric for a reason. Here’s why:
Profitability Signal: A high or rising EPS suggests strong profitability.
Investor Confidence: Analysts and investors use EPS to compare companies within the same industry.
Influences Stock Price: A better-than-expected EPS often drives stock prices up. A miss? Expect a dip.
Tied to P/E Ratio: EPS is the denominator in the price-to-earnings ratio, which is crucial for stock valuation.
When Warren Buffett or any big investor evaluates a company, EPS is one of the first things they look at.
Types of EPS (Yes, There’s More Than One!)
Not all EPS is created equal. Different variations give you different views of a company’s earnings.
Basic EPS
The most straightforward.
Doesn’t include potential dilution from stock options or convertible securities.
Diluted EPS
Takes into account all possible shares (options, warrants, convertible debt).
Gives a more conservative, “worst-case” picture.
Adjusted EPS
Companies sometimes adjust EPS by removing one-time costs or income (like lawsuits or asset sales).
Helps paint a more “normalized” picture of performance.
Cash EPS
Based on actual cash flow rather than accounting profit.
Popular with analysts because it can’t be manipulated as easily.
How to Calculate EPS (Step-by-Step Guide)
Let’s make it practical.
Formula Recap:
EPS = (Net Income − Preferred Dividends) / Weighted Average Shares Outstanding
Example:
Net Income: $1,000,000
Preferred Dividends: $100,000
Weighted Average Shares: 500,000
EPS = ($1,000,000 − $100,000) / 500,000 = $1.80
Result: The company earns $1.80 for every share.
Now, imagine comparing this to a similar company earning just $0.90 per share. You’d probably lean toward the one with a better EPS—assuming everything else is equal.
Here’s how I personally use it in my investment decisions:
Compare competitors: Two similar companies? EPS shows who’s more profitable.
Track growth over time: Is EPS rising every year? That’s a good sign.
Combine with P/E: A low P/E and high EPS = potentially undervalued stock.
Use in screeners: Set EPS growth filters on tools like Yahoo Finance or TradingView.
Tip: Don’t just look at one quarter. Always zoom out to see yearly trends.
EPS in Action: Case Studies
Let’s say you’re comparing Company A and Company B:
Company
Revenue
Net Income
Shares
EPS
A
$100M
$10M
10M
$1.00
B
$90M
$12M
6M
$2.00
Company B has lower revenue but higher EPS. It’s more profitable per share—which might make it the better pick, depending on other factors.
Another example: In March 2020, many companies saw EPS fall due to the pandemic. Yet those who recovered their EPS quickly became Wall Street favorites again (like Amazon and Microsoft).
12. FAQs: Clearing Up Common Doubts
What is a “good” EPS?
There’s no fixed number. A good EPS depends on the industry and stock price.
Can EPS be negative?
Yes. If a company loses money, EPS becomes negative—this is common for startups or during recessions.
Does EPS include dividends?
No. EPS is about earnings, not dividend payouts.
How often is EPS reported?
Quarterly, along with earnings reports.
EPS Is Powerful, But Not Everything
To wrap up—EPS is one of the best tools in your investing toolbox. It tells you how much profit is made per share and can signal whether a company is thriving or just surviving.
But like every tool, it works best in context.
Use EPS with other indicators. Ask questions. Look deeper. And remember—numbers don’t lie, but they can be dressed up.
