Earnings per share (EPS) tells you how much money a company makes relative to how many shares it has. This information can be a useful indicator as to how profitable a company is and help you decide whether or not you want to invest in it.
For that reason, EPS is very popular with investors and it’s common for financial reports that have been released by journalists or companies themselves to contain EPS figures.
How do you calculate Earnings Per Share?
Calculating EPS isn’t too hard and you should be able to do it without being a maths genius. All you need to use is this formula.
Earnings per share =(Profit - Dividends) Number of outstanding shares
We can make this more real with some numbers. Let’s imagine there was a company that:
- Made a profit of £100 million
- Paid out £10 million in dividends
- Had 20 million outstanding shares
We can put these numbers into our EPS calculation as follows:
- EPS = (100,000,000 - 10,000,000) 20,000,000
- EPS = 90,000,000 20,000,000
- EPS = £4.50
What does earnings per share mean for investors?
EPS is often used by investors to gauge how well a company is performing. If you see that a company’s EPS figures are improving over time, it could be a sign that the company is doing well.
EPS can also be looked at relative to share price. For example, if a company has EPS of £1 and its shares cost £2, investors in that company will be paying £2 for every £1 of profit that the company makes.
Can EPS be misleading?
In short, yes.
Calculating EPS is not hard but it involves figures that can be manipulated - either intentionally or unintentionally.
For example, imagine a company makes a profit of £100 million. This company also owns some very expensive real estate worth £100 million. The company decides that it no longer has any use for that real estate, so it sells it for £100 million.
Suddenly the company’s EPS will shoot up because its net income has doubled from £100 million to £200 million. But that figure is not actually reflective of how the company has done - it’s just gone up massively because the company sold its real estate holdings.
How should EPS be used?
Understanding EPS is a useful way to gauge how well a company is doing.
But like most things in the investing world, EPS should be one of many tools that you use to make investment decisions and manage risk. It should not be the be-all and end-all.
