Earnings Per Share (EPS)

Earnings per share (EPS) is a financial ratio which computes how much a firm earns in net profits which is attributable to common shareholders. It is calculated by dividing net earnings by the average number of shares outstanding in a given time period.

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Earnings Per Share Formula

The formula is: EPS= Net Income -Preferred Dividends/ Weighted Average number of Shares in issue. (E.g. Net Income £1, shares outstanding 1,000= EPS 1/1000 = 0.01P per share).

This number indicates the earnings power of a company.

It is better used to compare firms operating in the same industry – assuming the same number of shares outstanding, the higher EPS indicates better overall profitability.

Typically, the number is used in tandem with the share price to determine a P/E ratio, (price divided by EPS). The lower the P/E, the cheaper the company’s shares are.

Trading Using EPS

There are caveats to the use of EPS:

Earning Per Share is a simple and quick metric to use, for what might be a very complex organisation. It should therefore be treated with caution and not relied upon as the determining factor in making an investment.