Market Terms

Earnings per Share (EPS)

What is EPS?

EPS, or Earnings Per Share, is a financial measure that represents the portion of a company's profit attributed to each share. It is an important indicator of financial performance and is widely used by investors to evaluate the value of a company's shares.

What Does EPS Represent?

EPS represents the amount of profit that a company generates for each outstanding share. This means that the higher the EPS, the greater the share of profit each shareholder will receive. Moreover, EPS is also a measure of a company's financial efficiency because the more profit it generates per share, the better its performance.

It's important to note that we are not taking the share price into account in this calculation. Therefore, a high EPS may not mean much if the share price is also high. It's based on this that we can use EPS in conjunction with BVPS (Book Value Per Share) to arrive at the fair share price through Graham's Number.

By dividing the share price by the EPS, we can find the Price to Earnings (P/E) ratio of the company, which can indicate how cheap (or expensive) that stock is.

How Is EPS Calculated?

Calculating EPS is straightforward. Simply divide the company's annual net profit by the number of outstanding shares. Thus, we have:

For example, if the company SGAZ has a net profit of $1,000,000 and 100,000 shares outstanding, the EPS would be:

It's important to remember that EPS is a per-share number, which means it's the portion of the profit attributed to each outstanding share. The higher the number of outstanding shares, the lower the EPS, as the company's profit is more diluted among the shareholders.

Examples

MSFT:

Microsoft Corporation is a renowned software and technology company.

Its net profit in the 2Q2023 financial report was $20 billion, and it had a total of 7.472 billion outstanding shares. Therefore, we can calculate the EPS as follows:

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So, each Microsoft share represents $2.68 of profit for that quarter.