Loading the player...
A:

Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability. It is often considered to be one of the most important variables in determining a stock’s value, and it comprises the “E” part of the P/E (price-earnings) valuation ratio. EPS is calculated as:

EPS = net income / average outstanding common shares

For example, McGraw Hill Financial Inc (MHFI) reported first quarter 2014 net income of $248 million and had 277.2 million average shares outstanding. To calculate EPS, investors can insert these figures into the EPS calculation:

EPS = $248 million / 277.2 million = $0.89

Companies may choose to buy back their own shares in the open market. In doing so, a company can improve its EPS (because there are fewer shares outstanding) without actually improving net income. For example, if MHFI in the first quarter had used a share buy-back program to buy 100 million shares, its EPS would have been:

EPS = $248 million / 177.2 million = $1.40

Note: some companies have a special class of stock called preferred stock. Any dividends paid on preferred stock would be subtracted from net income when calculating EPS. The formula for calculating EPS would then be:

EPS = (net income – dividends on preferred stock) / average outstanding common shares

In our example, MHFI had and EPS of 89 cents for the first quarter of 2014. Knowing the EPS of an individual stock is not enough information to make an informed investment decision. EPS becomes meaningful when investors look at historical EPS figures for the same company, or when they compare EPS for companies within the same industry. MHFI, for example, is in the Business Services industry, so investors could consider the EPS of other stocks within that industry, such as Moody’s Corp (MCO). Since EPS is only one number, it’s important to use it in conjunction with other measures before making any investment decisions.

RELATED FAQS
  1. What are the best uses for trailing EPS, current EPS and forward EPS?

    The earnings per share (EPS) indicator has three basic types that can alert you to past, present and future health of a company. Read Answer >>
  2. What is the formula for calculating earnings per share (EPS) in Excel?

    Understand the basics of the earnings per share ratio and how this important financial metric is calculated in Excel and ... Read Answer >>
  3. What is the difference between earnings per share (EPS) and diluted EPS?

    Learn about EPS and diluted EPS, what they measure, and the difference between the two. Read Answer >>
  4. What does it signify about a company if there is a large difference between its EPS ...

    Learn more about basic earnings per share and diluted earnings per share, what the ratios measure and what a large discrepancy ... Read Answer >>
  5. How do you find the level of EBIT where EPS doesn't change?

    Learn about the relationship between earnings before interest and taxes (EBIT and earnings per share (EPS) and how to find ... Read Answer >>
  6. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
Related Articles
  1. Markets

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  2. Fundamental Analysis

    Assess Shareholder Wealth With EPS

    Find out if management is doing its job of creating profit for investors.
  3. Economics

    The 5 Types Of Earnings Per Share

    Understanding the many varieties of earnings per share will help investors make informed decisions.
  4. Professionals

    Basic Earnings Per Share

    CFA Level 1 - Basic Earnings Per Share. Learn about earnings per share and how it relates to simple and complex capital structures. Includes the formula and interpretation of EPS.
  5. Professionals

    Dilutive Securities

    CFA Level 1 - Dilutive Securities. This topic explains how dilutive securities affect shares outstanding. Shows how to determine if a security is dilutive or anti-dilutive.
  6. Fundamental Analysis

    Calculating Basic Earnings Per Share

    Basics earnings per share measures the amount of net income earned per share of outstanding stock.
  7. Forex Education

    Earnings Per Share

    Investing is a complex and often daunting experience, these equations are actually quite simple.
  8. Professionals

    Business and Financial Risk

    CFA Level 1 - Business and Financial Risk. Examine two more types of capital budgeting risk. Learn how business and financial risk relate to a company's leverage.
  9. Stock Analysis

    The Top 5 Financials Stocks for 2016 (JPM, BAC)

    Explore detailed analyses of the top five financials stocks to consider in 2016, and learn why they are poised to rise with interest rates.
  10. Markets

    How To Evaluate The Quality Of EPS

    Companies can manipulate their numbers, so you need to learn how to determine the accuracy of EPS.
RELATED TERMS
  1. Primary Earnings Per Share (EPS)

    One of two methods for categorizing shares outstanding. The other ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Cash Earnings Per Share - Cash EPS

    A measure of financial performance that looks at the cash flow ...
  4. Basic Earnings Per Share

    A rough measurement of the amount of a company's profit that ...
  5. Interim Earnings Per Share

    A measure of earnings calculated at a specified time, shorter ...
  6. Diluted Normalized Earnings Per Share

    A company's profit less one-time earnings, divided by both outstanding ...

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center