Earnings Per Share or ‘EPS’ is a financial metric used to evaluate a company’s profitability, this is calculated by dividing the company’s net income by the number of shares it has in circulation.
The formula for calculating EPS is as follows:
Net income – (number of shares X dividend per share) / Number of shares
To break this down a little further…
- Net Income, this is the total profit earned by the company after deducting expenses, taxes, and interest from its total revenue.
- Number of Shares, this refers to the total number of shares (or voting rights) that are held by investors and are available for trading.
- Dividend per share, this is simply the total dividend paid by the company over a full year.
EPS is a useful metric for investors as it indicates how much of a company’s profit is attributable to each share of a company. This can help to assess the company’s profitability on a per-share basis and is useful for comparing the performance of different companies within the same industry or for tracking a company’s performance over time.
EPS is often used to analyse and compare companies prior to making investment decisions, along with other financial metrics and factors such as price-to-earnings ratio (P/E), potential growth prospects, industry or economic trends and overall market conditions.