Earnings Per Share (EPS)
A company's net profit divided by its number of outstanding shares—basically, how much money the company makes for each share of stock you own.
If you want to know how profitable a company really is on a per-share basis, EPS is your go-to number. Say a company earns $1 billion in profit and has 500 million shares outstanding—its EPS is $2.00.
You'll see two flavors: basic EPS (uses the actual number of shares out there) and diluted EPS (factors in stock options, convertible bonds, and other securities that could become shares). Diluted EPS is the more conservative number, and it's what most analysts focus on.
Over the long term, EPS growth is what drives stock prices. A company growing EPS at 15% annually will roughly double its stock price every five years, all else being equal. Companies that consistently grow EPS faster than the market tend to be strong long-term performers.
Every quarter, companies report their actual EPS versus what analysts predicted—and these announcements can move stock prices dramatically. Beating estimates by even a few cents can send a stock higher, while missing can trigger a sharp decline.
One caveat: EPS can be gamed. Companies can boost EPS through accounting choices or share buybacks (fewer shares outstanding means higher EPS even without more profit). Smart investors look at EPS alongside cash flow, revenue growth, and other metrics to get the full picture.
Frequently Asked Questions
▸Is higher EPS always better?
Higher EPS means more profit per share, but context matters. Compare EPS to the stock price using the P/E ratio, and compare it to competitors. A $10 EPS on a $50 stock is very different from $10 EPS on a $500 stock. The growth rate of EPS matters more than the raw number.
▸What's the difference between basic and diluted EPS?
Basic EPS uses actual shares outstanding. Diluted EPS includes all potential shares from stock options, convertible bonds, and warrants—making it lower and more conservative. Think of diluted EPS as the 'worst case' scenario with maximum dilution. Analysts typically focus on the diluted number.
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