Earnings Per Share (EPS): What It Tells You

Earnings Per Share (EPS) is one of the most important numbers in stock analysis. It tells you how much profit a company makes for each share of stock. Understanding EPS helps you evaluate profitability and compare companies. Let us break it down.

What is Earnings Per Share?

EPS shows a company's profit divided by its number of outstanding shares. It answers the question: "How much money did this company earn for each share?"

When a company reports earnings each quarter, EPS is often the headline number that moves the stock price. Beating or missing EPS expectations can cause big price swings.

Basic EPS vs. Diluted EPS

You will often see two EPS numbers reported:

Basic EPS

Uses the actual number of shares currently outstanding. This is the straightforward calculation described above.

Diluted EPS

Accounts for all potential shares that could exist if stock options, convertible bonds, and other securities were converted to common stock. Diluted EPS is always equal to or lower than basic EPS.

Most investors focus on diluted EPS because it accounts for potential dilution from stock-based compensation and convertible securities.

Why EPS Matters

EPS is important for several reasons:

1. Profitability measure

EPS shows how profitable a company is on a per-share basis. Growing EPS generally means a healthier, more profitable business.

2. Valuation tool

EPS is the "E" in the P/E ratio. Without EPS, you cannot calculate P/E, one of the most common valuation metrics.

3. Earnings beats and misses

Every quarter, analysts estimate what EPS will be. If actual EPS beats estimates, the stock often goes up. If it misses, the stock often drops. This makes EPS crucial for short-term traders.

4. Comparing companies

You cannot compare total profits of a large company to a small company. But you can compare their EPS and EPS growth rates.

EPS Growth: The Key Metric

While EPS itself is important, EPS growth rate tells you more about a company's trajectory.

Year-over-year (YoY) EPS growth

Compares EPS to the same quarter last year. A company reporting Q1 EPS of $1.50 vs. Q1 last year of $1.25 has 20% YoY growth.

Quarterly sequential growth

Compares to the previous quarter. This can be affected by seasonality (e.g., retailers earn more in Q4 due to holidays).

Long-term EPS growth

Look at EPS growth over 3-5 years for a clearer picture of trends. One good or bad quarter does not define a company.

EPS vs. Revenue Growth

Both matter, but they tell different stories:

Revenue growth shows if a company is selling more products or services. It is the "top line" of the income statement.

EPS growth shows if a company is becoming more profitable. It is the "bottom line" result.

The best companies grow both. But watch out for:

• Revenue growing but EPS flat: Margins are shrinking. The company may be spending too much to grow.
• EPS growing but revenue flat: Growth may come from cost-cutting, which has limits. This is not sustainable long-term.

How Companies Can Manipulate EPS

EPS can be influenced by various factors beyond actual business performance:

Stock buybacks

When a company buys back its own shares, the share count decreases. This automatically increases EPS even if profits stay the same. Many companies use buybacks to boost EPS.

One-time items

Companies may have one-time gains (selling a building) or one-time losses (lawsuit settlement) that distort EPS. Look at "adjusted EPS" that excludes these items, but be cautious as companies can abuse this.

Accounting choices

Revenue recognition timing, depreciation methods, and other accounting decisions affect reported earnings. Two similar companies can report very different EPS based on accounting choices.

Where to Find EPS Data

EPS information is available in several places:

• Company earnings releases: Published quarterly
• SEC filings: 10-K (annual) and 10-Q (quarterly) reports
• Financial websites: Yahoo Finance, Google Finance, MarketWatch
• Your brokerage: Most brokers provide EPS data

EPS in the Earnings Calendar

Every quarter, companies report earnings. Here is what to watch:

EPS estimate: The average analyst prediction for EPS

Actual EPS: The reported number

EPS surprise: The difference between actual and estimated

Even if EPS is positive, the stock can fall if it misses estimates. And even if EPS is lower than last year, the stock can rise if it beats expectations. What matters is EPS versus expectations.

Limitations of EPS

EPS has important limitations:

• Does not show cash flow: Earnings are an accounting concept; cash flow shows actual money
• Can be negative: Unprofitable companies have negative EPS, making ratios useless
• Varies by accounting standards: US GAAP and international IFRS can produce different EPS
• Industry differences: Capital-intensive industries have different EPS patterns than asset-light businesses

Summary

Earnings Per Share (EPS) measures a company's profit on a per-share basis. Focus on diluted EPS for the most conservative view, and pay attention to EPS growth rates over time. Remember that EPS can be influenced by buybacks and accounting choices, so always look at the full picture including revenue growth and cash flow.

Want to learn more? Read our guide on P/E ratio or learn about dividend yield.