EPS per share

Definition

EPS per share, or earnings per share, is a financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock. It serves as a key indicator of a company's profitability and is often used by investors to assess financial performance, compare companies within the same industry, and make informed investment decisions.

5 Must Know Facts For Your Next Test

1. EPS is calculated by dividing net income by the weighted average shares outstanding during a given period.
2. Investors often use EPS to evaluate a company's profitability over time and to compare performance across different companies.
3. There are two types of EPS: basic EPS, which uses only the shares currently outstanding, and diluted EPS, which includes potential shares from securities that can be converted into common stock.
4. EPS is reported on a company's income statement and is typically included in earnings announcements, making it a widely discussed financial metric in investment circles.
5. A growing EPS can indicate a company’s improving profitability, while a declining EPS may raise concerns about its financial health.

Review Questions

• How is EPS per share calculated and what factors can influence its value?
  • EPS per share is calculated by dividing net income by the weighted average shares outstanding during a specific period. Factors influencing its value include changes in net income due to operational performance or market conditions, as well as fluctuations in the number of shares outstanding due to stock buybacks or issuance of new shares. Additionally, the presence of convertible securities can impact diluted EPS figures, reflecting potential future dilution.
• Discuss the significance of both basic and diluted EPS in evaluating a company's financial performance.
  • Basic EPS provides a straightforward view of earnings allocated to each share currently outstanding, making it useful for investors looking for a simple assessment of profitability. Diluted EPS offers a more conservative measure by considering potential dilution from convertible securities and options, giving investors insight into what earnings could look like if all potential shares were exercised. This distinction helps investors better understand the underlying risk associated with their investments.
• Analyze how changes in EPS can impact investor perception and stock prices in the market.
  • Changes in EPS can significantly influence investor perception and subsequently affect stock prices. An increase in EPS typically signals stronger profitability and can lead to higher investor confidence, resulting in increased demand for the stock and potentially raising its price. Conversely, a decline in EPS may trigger concerns about a company's financial health, prompting investors to sell off their shares. As EPS is often tied to company forecasts and market expectations, consistent tracking of this metric allows investors to make informed decisions based on perceived future performance.

Related terms

Net Income: The total profit of a company after all expenses, taxes, and costs have been deducted from total revenue.

Weighted Average Shares Outstanding: The average number of shares that are outstanding during a specific period, adjusted for stock splits and dividends.

Diluted EPS: A measure of earnings per share that accounts for all potential shares that could be created from convertible securities, options, and warrants.