EPS stands for earnings per share, and it’s the easiest way for investors to quickly assess how much a company is earning relative to its stock price.
EPS gives investors a standardized way to determine a company’s profit and evaluate how expensive the stock is. Here’s what you need to know about EPS.
How to calculate EPS
EPS is one of the most straightforward financial calculations to make. Here’s how to determine a company’s EPS:
- Find a company’s reported earnings. This number is in its quarterly or annual filings (Forms 10-Q or 10-K) with the SEC or in a press release about earnings.
- Then divide by the company’s shares outstanding, which can also be found in the filings and sometimes in press releases about earnings.
So, EPS = earnings / shares outstanding. The resulting figure is typically rounded to two decimal points.
When locating a company’s earnings figure, it’s important to make sure you’re looking at net earnings, or net income. This is the amount of profit after all expenses and taxes have been accounted for. Many companies report adjusted earnings figures that exclude certain real costs.
Let’s run through a calculation. The earnings of Company A over the past year were $10 million. It has 20 million shares outstanding. Therefore, its EPS is $0.50, or $10 million divided by 20 million.
In real life, the numbers are less round than this, and your broker and many financial websites such as Yahoo Finance will do the calculation for you.
What EPS means
If you’ve ever listened to the financial media, they’ll often discuss a company’s earnings report in terms of EPS, instead of the absolute level of a company’s profits.
For example, a reporter might say, “Microsoft earned $2.17 last quarter” or “Apple beat earnings expectations by 5 cents.” The reporter is explaining the results in terms of per-share profit, not absolute profit. In other words, Microsoft didn’t literally earn a mere $2.17, nor did Apple exceed analysts’ estimates by a mere nickel.
So why refer to earnings in this way? For at least two reasons:
- First, using EPS makes it much easier to discuss a company’s financials in a comprehensible way. Instead of talking about Apple’s $5.3 billion profit, it’s easier to handle a per-share figure. Plus, Wall Street analysts estimate their earnings using EPS.
- Second, EPS provides a shortcut for determining how the market is valuing a company. That is, if Microsoft reports annual earnings of $5 per share and its stock is $100 per share, the stock’s price-earnings ratio (P/E) is 20. Investors don’t have to figure the company’s market capitalization and then divide by its earnings to get to the P/E, and instead need just the EPS and stock price.
EPS on its own doesn’t tell you a lot. It tells you only the company’s reported earnings per share over a specific period, usually a given year. So a company with low EPS and one with high EPS may both be good investments. Instead, to determine whether a given EPS number is good, investors must ask questions that contextualize EPS:
- In which direction is EPS moving? Higher, lower, flat?
- How much is EPS expected to move over the next year or two?
- How much investment was required by the company to generate the earnings?
- Is the company doing anything to change the calculation, such as increasing shares (perhaps through stock and options grants to executives)?
- Is the company reducing share count in some way, such as by repurchasing its own stock?
Don’t forget that there are two halves to the EPS equation — the earnings half and the shares half — and companies can take actions that affect both. You’ll want to examine what’s happening on both sides.
Finding a company’s EPS is the first step in evaluating it, but investors need to consider many more factors when determining whether to invest in a stock. Here are 8 guidelines you should follow as you’re starting to invest.