What Is EPS?
EPS stands for Earnings per Share. It’s a way to measure how much money a company makes for each share of its stock. Investors use EPS to figure out how profitable a company is. Basically, it shows how much profit the company is making per share that people can buy or sell.
How Is EPS Calculated?
The formula for EPS is pretty simple:
EPS = Net Income ÷ Number of Shares
Let’s say a company makes $10 million in profit and has 5 million shares. The EPS would be $2. That means the company made $2 of profit for every share someone owns.
Why Is EPS Important?
EPS helps investors compare companies. A higher EPS usually means the company is more profitable. When a company has growing EPS year after year, it often shows that the business is doing well.
EPS also plays a big role in other investing tools, like the P/E ratio (which we covered in the last lesson). It’s one of the first numbers investors look at when deciding whether a company is worth buying stock in.
Types of EPS
There are a couple of different kinds of EPS you might hear about:
- Basic EPS: This is the regular version based on the current number of shares.
- Diluted EPS: This one includes the potential shares that could exist if employees or investors use stock options or convert bonds into shares. It shows a more cautious view.
Most of the time, investors look at diluted EPS to get a clearer picture of the company’s earnings.
What Affects EPS?
Lots of things can change a company’s EPS. If a company earns more money or buys back its own shares, EPS usually goes up. If profits fall or the company issues more shares, EPS can go down. So, when you look at EPS, it’s also smart to check what’s causing the change.
Conclusion
Earnings per Share is a simple but powerful number that shows how much profit a company makes per share. It helps you understand a company’s financial health and is one of the most important numbers in the world of investing. If you’re learning how to pick stocks, knowing what EPS means is a great place to start.
