What is EPS?
13045 reads · Last updated: December 5, 2024
Earnings per share (EPS) is calculated as a company's net income divided by the outstanding shares of its common stock. Calculated as follows: EPS = Net Income / Outstanding SharesEarnings per share (EPS) is one of the criteria for judging a company's profitability. If the value is higher year by year, it means that the company is making more money year by year.
Definition
Earnings Per Share (EPS) refers to the portion of a company's profit allocated to each outstanding share of common stock. The formula is: EPS = Net Profit / Share Capital. EPS is one of the standards for assessing a company's profitability; if the value increases year by year, it indicates that the company is becoming more profitable over time.
Origin
The concept of EPS originated in the early 20th century and became widely used with the proliferation of modern corporate financial statements. It provides investors with a straightforward way to evaluate a company's profitability and financial health.
Categories and Features
EPS can be divided into basic EPS and diluted EPS. Basic EPS considers only common shares, while diluted EPS accounts for potential dilution from convertible securities and stock options. Basic EPS is used to assess current profitability, whereas diluted EPS offers a more conservative view of profitability.
Case Studies
Case 1: Apple Inc. reported an EPS of $3.28 for the fiscal year 2020, up from $2.97 in 2019, indicating enhanced profitability. Case 2: Tesla, Inc. achieved significant EPS growth in 2021, increasing from $0.64 in 2020 to $4.90 in 2021, reflecting its successful expansion in the electric vehicle market.
Common Issues
Investors often misunderstand that EPS growth is always positive; however, growth may result from one-time gains or accounting adjustments rather than sustained operational improvements. Additionally, ignoring diluted EPS can lead to overly optimistic assessments of a company's profitability.
