Understanding Earnings Per Share

Blain Reinkensmeyer

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Earnings Per Share (EPS) is one of the most widely used statistics of fundamental analysis. Did you know that Earnings Per Share is arguably the single most important variable in determining the share price of a stock? This post will explain Earnings Per Share in simple 101 stock trading terms, and give you a better understanding of how it is used.

Definition

Earnings Per Share by definition is the portion of a company’s profit allocated to each outstanding share of stock. In simple terms, it tells us how valuable each share is to us as an investor.

By knowing the EPS, we can get a glimpse into what a company’s profitability is. And, obviously the more profitable the company is, the better off the stock should be, making it a better investment long term.

Calculating EPS

To calculate Earnings Per Share, you simply divide the net income by the total outstanding shares.

So, let’s take an example and say that company XYZ had $50 million in net income for the year, alongside 10 million outstanding shares. Divide the 50 million by the 10 million and we come out with an EPS of $5 per share. That means that the company is making $5 for every currently outstanding share of stock.

Other Notes

There are actually quite a few types of EPS. I won’t go into them now because that would take away from the simplicity we have here, but just so you have an idea they are: Reported EPS (GAAP EPS), Ongoing EPS, Pro Forma EPS, Headline EPS, and Cash EPS. Really it all comes down to who and what is being used to calculate the net income or the total outstanding shares. Is it the company accountant or an analyst? Is it based off an SEC filing or a research report? It all comes to play.