Earnings Per Share – EPS

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Seth Carlson

Editorial staff, J.P. Morgan Wealth Management

There are many ways to compare companies and measure financial performance. One method, favored by many investors for its relative simplicity, is the company’s earnings per share (EPS). But what is EPS, exactly? Put simply, EPS is how much of the company’s profit is allocated to each outstanding share. EPS can be useful to investors in a few ways but has a few limitations to keep in mind. 

EPS overview

EPS provides an indication of how much profit is allocated to each outstanding share. EPS is one of the most common ways to gauge a company’s profitability. Generally, a company with high EPS is considered more profitable than one with lower EPS. However, it’s generally recommended to look at EPS in conjunction with other metrics and qualitative factors.

How to calculate EPS

To calculate a company’s EPS:

Net income is the amount of money a company has left after all cash and non-cash expenses have been deducted for that reporting period. Preferred dividends are subtracted from net income because investors who hold preferred stock have rights to dividend payouts in their contracts.

EPS calculation example

How do you calculate EPS? Let’s look at an example and apply the EPS formula. Say you wanted to calculate the EPS of one of your favorite streaming services. Just as an example, let’s suppose the company:

To calculate the streaming service’s EPS, simply divide $4 billion by 400 million to get $10. That is the streaming service’s EPS value.

Now, suppose they did issue preferred stock and paid out $400 million in preferred dividends. Here’s how you would calculate the EPS in that case:

To calculate the EPS, divide $3.6 billion by 400 million to get $9. This shows how preferred dividends affect the EPS calculation.

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How investors use EPS

Earnings per share is a key metric for assessing a company’s profitability. EPS is also important for calculating the price-to-earnings (P/E) ratio. In the P/E ratio, the “E” refers to earnings per share. By dividing a firm’s share price by its EPS, investors can determine the value of a stock in terms of how much the market is willing to pay for each dollar of the company’s earnings.

Drawbacks of EPS

Although EPS may give investors helpful information, it’s only one piece of the puzzle when evaluating a company or stock. Here are some potential drawbacks of using EPS for investment decisions:

Therefore, while EPS is useful, it should be considered alongside other metrics for a more comprehensive understanding of a company’s financial health.

Basic EPS and diluted EPS

There are a few different ways to measure EPS. For example, there is “basic” EPS, which is described in the streaming service example above. Another measure is “diluted” EPS, which accounts for all potential shares outstanding, including convertible debt and employee stock options.

For example, imagine a technology company that has net income of $450 million. Suppose the company has 95 million outstanding shares and has issued 5 million stock options to employees, increasing its total outstanding share count to 100 million. To calculate the tech company’s diluted EPS, divide its net income of $450 million by 100 million shares, resulting in a diluted EPS of $4.50.

Diluted EPS is a more conservative way to measure a company’s value, especially for companies that are expanding quickly and issuing more shares to drive growth.

EPS and adjusted EPS

When analyzing a company’s EPS, it’s helpful to determine if you are looking at its EPS or its adjusted EPS. Often, companies calculate their EPS using a net income figure adjusted for one-time expenses and profits. These adjustments can include losses from emergencies or gains from sales of business units.

However, companies sometimes adjust their net incomes in ways that can be misleading, inflating their adjusted EPS numbers. Thus, it’s generally recommended to do some digging into how companies are making these adjustments for a more accurate assessment of their financial performance.

What is a good EPS?

When evaluating a company, it’s more important to look at the year-over-year (YOY) change in EPS rather than the absolute value of the metric. It’s generally a good idea to consider a company’s EPS alongside its share price by examining its P/E ratio or earnings yield. Additionally, you may want to review the company’s recent overall performance, how its competitors are doing and analysts’ predictions for its stock.

EPS is a helpful way to better understand a company, but it’s important to evaluate investments holistically. And this means considering various factors and metrics to get a more complete picture of a company’s financial health and potential for growth.

Frequently asked questions

What is stock EPS?

A company’s earnings per share (EPS) tells investors how profitable a company has been over a specific period. EPS is calculated by dividing the company’s total earnings for the period by the number of outstanding common shares and is typically released quarterly and annually. This amount represents what each share would receive if all the net income were distributed as profits.

What is the difference between EPS and adjusted EPS?

Adjusted EPS is a type of EPS calculation in which adjustments are made to account for unusual circumstances. For example, if a company made unusually high profits because of a one-time situation (such as the sale of property), this could be removed from the net income when calculating the EPS. That way, the adjusted EPS would be lower, but it might be a more accurate representation.

Where does a company report its EPS calculation?

A company’s EPS can be found in the income statement portion of both the quarterly (10-Q) and annual (10-K) releases of its financial statements that it must file with the Securities and Exchange Commission (SEC).

Why is earnings per share important?

Earnings per share is important because it is a widely used metric to determine a company’s value and profitability. Understanding EPS can help you evaluate a company by showing what they are able to deliver on a per-share basis. This can be helpful as a universal measure to compare two potentially very different companies in what might otherwise be an apples-to-oranges comparison. EPS is also used in other calculations, like P/E ratio.

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Editorial staff, J.P. Morgan Wealth Management

Seth Carlson is on the editorial staff of the J.P. Morgan Wealth Management (JPMWM) content team. Prior to joining JPMWM, he worked in higher education admissions and enrollment management marketing at Mercy University in New York. There, he serve...

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