Definition
Earnings per share (EPS) is a metric used to estimate how much money a company makes for each of its stocks. It gives insight into the company’s profitability by reflecting the amount of money that it makes for every share of its stock. It is calculated by dividing the company’s net profit by its total stock. Higher EPS is a sign that the company is more profitable.
Example
Earnings per share = Net income / Outstanding sharesSuppose a company's net income is $5 billion and the number of shares outstanding is 1 billion.Basic earnings per share = (5 billion / 1 billion) = $5
Why it matters
Here is how EPS can help in gauging a company's financial state and profitability: 1. EPS of different companies can be compared against each other while picking the most profitable investment option.2. It can help in comparing a company's financial standing over the years. Companies that have shown a steady rise in EPS can be considered reliable for investment. Companies that have irregular EPS are mostly not preferred by seasoned investors.3. A higher EPS indicates more profitability, which means likelihood of higher dividend payout over time.4. EPS helps in measuring a company's current financial standing and also in tracking its past performances.