EPS or Earnings Per Share is one of the most important financial figures to check when you’re looking at a company’s profitability and financial health. But what exactly is EPS? How is it calculated? And what different types of EPS should investors know about? Let’s break it down clearly and simply.

What is EPS?

EPS stands for Earnings Per Share. It refers to the profit a company earns for each of its stocks. If a company earns a profit (net income) at the end of the year, this profit will then be divided by the number of shares that people own to find out how much money each share “earned.”

Simply put, EPS tells you how much profit you get if you own one share of that company. If EPS is high, it typically indicates that the company is generating a substantial profit and can be a sign of financial strength. Companies with higher EPS generally attract more investor interest because it shows they are earning more profit per share.

For example, if a company earns ₹10 crore in profit and there are 1 crore outstanding shares, then the EPS is ₹10 per share. This means each share corresponds to ₹10 of profit for the company.

How to Calculate Earnings Per Share (EPS)

Understanding how to calculate EPS is essential for decoding the numbers you see in financial reports.

The most common formula used to calculate EPS  is:

EPS = (Net Income−Preferred Dividends)/Average Outstanding Shares

Where,

  • Net Income: This is the company’s profit after all expenses and taxes.
  • Preferred Dividends: These are dividends that must be paid to preferred shareholders before they are paid to common shareholders.
  • Average Outstanding Shares: The average number of shares available during the period, adjusted for any stock issuance or buybacks.

Let’s understand this with an example: 

Suppose company XYZ Ltd has:

  • Net income of ₹50,00,000
  • Preferred dividends of ₹5,00,000
  • Average outstanding shares: 10,00,000 shares

Then,

EPS = (₹50,00,000−₹5,00,000)/10,00,000 = ₹4.50

This means that each share of the company earned ₹4.50 in profit during the period.

Why Use Weighted Average Shares?

Since the number of shares can change throughout the year due to buybacks, additional issuance, or other adjustments, using a weighted average provides a more accurate reflection of shares outstanding over the period, rather than just the number of shares at the end of the year.

Why is EPS Important for Investors?

EPS plays a crucial role for investors because it shows the company’s profitability on a per-share basis. Here’s why investors care about EPS:

  • Profitability Indicator: It provides a quick snapshot of a company’s profitability.
  • Share Value Insight: Higher EPS often leads to a higher share price because it means more earnings per share.
  • Earnings Comparison: EPS allows investors to compare profits between companies or check a company’s performance over time.
  • Dividend Decisions: Companies with steady or rising EPS are more likely to pay dividends.
  • Valuation Tool: EPS is used in calculating the Price-to-Earnings ratio (P/E ratio), which helps investors know if a stock is over- or undervalued.

Basic Vs. Diluted EPS

There are different types of EPS that provide varied insights about a company’s performance and financial condition:

Basic EPS

This is the straightforward EPS calculation described above. It accounts for actual shares currently outstanding and net income minus preferred dividends.

Diluted EPS

Diluted EPS considers all possible shares that could exist if convertible securities like stock options, convertible bonds, or warrants were converted into shares. This number is always less than or equal to Basic EPS because it assumes more shares in the denominator, which could dilute earnings. Diluted EPS helps investors see the potential worst-case earnings per share if all convertible securities were converted into shares. It is useful when companies have stock options or convertible securities outstanding.

Other types of EPS include:

Reported EPS (GAAP EPS)

Reported EPS is calculated under Generally Accepted Accounting Principles (GAAP). It reflects the official earnings figure for the period, including all standard accounting rules. Sometimes, GAAP EPS may be influenced by one-time gains or losses, so it may not always accurately represent ongoing profitability.

Pro Forma or Ongoing EPS

This type excludes unusual or one-time items such as the sale of assets, legal settlements, or extraordinary income/loss to give an idea of the company’s normal earning power.

Cash EPS

Cash EPS focuses on cash flow rather than profits reported on the income statement. It uses operating cash flow instead of net income, giving insight into the company’s cash earnings per share. This is harder to manipulate and reveals the cash profits available to shareholders.

Retained EPS

This reflects earnings that remain with the company, rather than being paid out as dividends. It shows profits retained for reinvestment or to pay down debt.

Book Value EPS

Book Value EPS indicates the equity value per share based on the company’s net assets or book value. It is useful for estimating the value of each share if the company were to be liquidated.

Factors that Affect EPS

Several factors can impact a company’s EPS, and investors should be aware of these to accurately evaluate changes:

  • Revenue Growth: Increased sales and higher profits drive EPS growth.
  • Cost Control: Efficient management reduces expenses and increases EPS.
  • Share Buybacks: When companies repurchase their own shares, fewer shares remain outstanding, which raises EPS.
  • Dividends to Preferred Shareholders: The more dividends paid to preferred stockholders, the less profit remains for common shares.
  • Economic Conditions: Interest rates, inflation, and economic growth impact company earnings, which in turn affect EPS.
  • Dilution: Issuing new shares dilutes EPS by increasing the denominator.

Conclusion

Earnings Per Share (EPS) is a commonly used financial metric that helps investors understand how much profit a company generates per share. It is easy to calculate and interpret, yet very insightful for judging a company’s profitability, comparing firms, and guiding investment decisions.

You should keep in mind that while EPS is important, it works best when combined with other financial ratios and qualitative analysis. Paying attention to EPS trends, types, and factors affecting it can help make smarter investment choices. 

FAQs

1. How often is EPS reported?

Indian companies typically report EPS every quarter and annually. This enables investors to track the company’s profitability across various periods.

2. Can EPS be negative?

Yes. EPS can be negative if a company faces losses, indicating it did not earn a profit that year.

3. Does high EPS guarantee a good investment?

Not necessarily. High EPS indicates profitability, but investors must also consider growth prospects, industry trends, and valuation before making an investment decision.

4. What is diluted EPS, and why does it matter?

Diluted EPS shows earnings per share if all convertible securities turn into shares. It helps foresee dilution risks and adjusts profitability accordingly.

5. Why does EPS change over time?

EPS changes due to variations in profits, share count, dividends, or extraordinary items impacting net income.

Disclaimer and Disclosure 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Registration granted by SEBI, enlistment as Research Analyst with Exchange and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Kindly refer to  https://share.market/ for more details.Investments in WealthBaskets are subject to the Terms of Service. All investors are advised to conduct their own independent research into investment strategies before making an investment decision. PPWB acts as a distributor of mutual funds and WealthBaskets and it is not an exchange traded product. Disputes with respect to the distribution activity of Mutual Funds and WealthBaskets will not have access to Exchange investor redressal or Arbitration mechanism. The securities are quoted as an example and not as a recommendation. This is for informational purposes and should not be considered as recommendations.

PhonePe Wealth Broking Private Limited is a member of NSE & BSE with SEBI Regn. No.: INZ000302639, Depository Participant of CDSL Depository with SEBI Regn. No.: IN-DP-696-2022, Research Analyst with SEBI Regn No: INH000013387, BSE RA Enlistment Number: 5887 and Mutual Fund distributor with AMFI Registration No: ARN- 187821. Member ID: BSE- 6756, NSE- 90226. Registered office – 2, Floor 3, Wing A, Block A, Salarpuria Softzone, Service Road, Green Glen Layout, Bellandur, Bengaluru South, Bengaluru, Karnataka – 560103, INDIA. CIN: U65990KA2021PTC146954