What is EPS?

Earnings Per Share (EPS) is a financial metric that represents a company´s profitability on a per-share basis. It is calculated by dividing the company´s net income by the number of outstanding shares. EPS is one of the most commonly used indicators for evaluating a company´s financial performance.

Why EPS is Important

EPS is important because it gives investors insight into the company´s profitability, allowing them to gauge how much money the company is making per share. A higher EPS typically indicates better financial health and greater potential for growth. Investors often compare a company´s EPS to industry averages or past performance to assess its profitability trajectory.

How to Calculate EPS

To calculate EPS, the formula is as follows:

EPS = (Net Income - Dividends on Preferred Stock) / Weighted Average Shares Outstanding

This formula calculates the portion of a company’s profit that is allocated to each outstanding share of common stock.

Types of EPS

There are different types of EPS, each serving a specific purpose:

• Basic EPS: This is calculated using the net income of the company divided by the weighted average number of shares outstanding.
• Diluted EPS: This accounts for all possible shares that could be issued through stock options, convertible securities, etc.

Advantages and Limitations of EPS

While EPS is a crucial measure of profitability, it does have limitations:

• Advantages: Provides a clear and concise metric for comparing profitability across companies, useful for stock valuation.
• Limitations: EPS can be manipulated by accounting methods or share buybacks, which may not always reflect the company´s true financial health.