One of the most important financial metrics in stock investing is a company’s earnings per share (EPS). It’s also known as “earnings power” or simply “earnings.” Earnings per share measures a company’s profits and helps investors quantify the value of their investments. EPS is calculated by dividing a company’s annual profits by the total number of its outstanding shares of common stock. In this article, we’ll break down exactly what earnings per share is, how it’s calculated, and why it is an important tool when researching and analyzing stocks.

The Basics of Earnings per Share

EPS is used to measure the profitability of a company by looking at its profits divided by its share price. EPS gives investors a reference point to cross-compare companies within a given sector or industry. It’s a measure of a company’s ability to generate profits and divide that profit among its shareholders. In other words, it shows how much each share of stock is worth in terms of earnings.

When assessing stocks, EPS helps investors determine whether a company’s share price accurately represents its profitability or if it’s undervalued or overvalued. Higher EPS means a company is more profitable and its share price may be worth investing in it. Low EPS means a company is less profitable and its stock price may be too high.

Calculating Earnings per Share

EPS is calculated by dividing a company’s total earnings by its total number of outstanding shares of common stock. The following formula is used to calculate EPS:

EPS = (Net income – Preferred stock dividends) ÷ Average outstanding shares

Net income is the total revenue of a company minus all of its expenses, such as operating costs, taxes, and other costs. The preferred stock dividends refer to the dividends paid to holders of preferred stock. Average outstanding shares is the number of shares of common stock that are currently held by shareholders, including both those held by institutional and individual investors.

Using Earnings per Share for Analysis

Investors often use earnings per share (EPS) as one of the first indicators when researching and analyzing stocks. EPS tells investors how much a company is earning per share and gives them a reference point when comparing stocks within an industry.

In addition to comparing stocks in the same industry, investors may also use EPS to compare a company’s performance over different time periods. For example, if the EPS of a company over a three-year period is consistently increasing, then it may be a good sign that the stock is undervalued. On the other hand, a consistently decreasing EPS over the same period may mean the stock is overvalued.

EPS can also be used to calculate a company’s price-to-earnings ratio (P/E), which is another commonly used metric for stock analysis. The P/E ratio is calculated by dividing a company’s current market price by its EPS. Companies with higher EPS usually have a higher P/E ratio, and vice versa.

Investors also use EPS to identify a company’s potential for future growth. Companies with higher EPS usually have better prospects for increasing their share price in the long run. This can be a great indicator of potential investment opportunities.

Analyzing the Trailing and Forward EPS

The trailing or historic earnings per share (EPS) is the EPS for a certain timeframe in the past. For example, if a company’s current EPS is $2.00, and its prior year’s EPS was $1.75, then its trailing EPS is $1.75. The trailing EPS is useful for analyzing a company’s historical performance and to compare its profitability over time.

The forward earnings per share (FPS) is the estimated EPS of the company for its current fiscal year. Analyzing the forward EPS helps investors predict a company’s future performance and compare its current share price to the estimated EPS.

Earnings per share (EPS) is an important metric for analyzing stocks, as it measures the profits of a company and helps investors determine if its stock is undervalued or overvalued. EPS is calculated by dividing a company’s total earnings by its total number of outstanding shares of common stock. Investors use EPS to compare the profitability of companies within a given sector and to calculate a company’s price-to-earnings ratio. In addition, investors analyze both the trailing EPS and forward EPS to gain a complete understanding of a company’s past and future performance.