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Formula
Earnings Per Share = (Net Income - Dividends) / Average Shares
Know your metric
Importance of
Earnings Per Share
Key Profitability Measure
EPS is a widely used indicator of a company's profitability, distilled down to a per-share basis, making it easy for investors to use in valuations.
Comparability
It enhances comparability among companies, especially when assessing potential investments on a per-share basis.
Influence on Stock Price
EPS is a major determinant of a company’s share price and often influences investor sentiment and market movements.
Drawbacks of
Earnings Per Share
Manipulation Risk
Companies can manipulate EPS through strategies like share buybacks, which reduce the number of outstanding shares without necessarily improving operational performance.
Does Not Account for Capital Structure
EPS does not reflect the company’s capital structure, as it does not account for the costs of debt, which can affect a company’s risk profile and financial health.
Volatile
EPS can be highly volatile from quarter to quarter, influenced by non-operational factors like tax changes, accounting adjustments, or one-time gains and losses.
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