Earnings Per Share (EPS) is a financial metric that indicates a company’s profitability by dividing net income by the number of outstanding shares of common stock. In other words, EPS represents the portion of a company’s profit allocated to each outstanding share of common stock.
The formula to calculate EPS is:
EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares
For example, if a company has a net income of $1,000,000, no dividends on preferred stock, and an average of 500,000 shares outstanding during the year, the EPS would be:
EPS = $1,000,000 / 500,000 = $2 per share
EPS is an important measure for investors as it gives them a clear view of a company’s profitability. A higher EPS indicates greater value because investors will pay more for a company’s shares if they think the company has higher profits relative to the share price.
It should be noted that EPS doesn’t consider the capital structure of a company (the proportion of debt and equity that a company uses to finance its operations), and hence, it should be used along with other financial metrics to get a complete picture of a company’s financial health.