Fundamental Earnings Per Share (EPS)

What Are Earnings per Share (EPS) in Simple Terms?

Earnings per share — often abbreviated EPS — is a metric that expresses a company's profit on a per-share basis. In other words, EPS allows investors to examine how much profit a company generates over the course of a year (or quarter) for each share of stock it has issued. EPS is a commonly used measure of a company's profitability, and it is used in the calculation of other popular valuation metrics like the price-to-earnings (P/E) ratio.

How Do You Calculate Earnings per Share?

To calculate earnings per share, divide a company's annual profit by the number of shares of stock it has outstanding. On the off chance that a company has both preferred and common stock, just common stock is included in this calculation.

Earnings per Share Formula

EPS = Annual Profit/Outstanding Shares of Common Stock

Earnings per Share Example: Tesla (NASDAQ: TSLA)

Tesla turned a profit without precedent for 2020. That year, they reported a profit (net income) of $721 million and had 1.083 billion outstanding shares of common stock.

EPS = Annual Profit/Outstanding Shares of Common Stock

Tesla's 2020 EPS = $721 million/1.083 billion outstanding shares of common stock

Tesla's 2020 EPS = $0.6657

What Do High Earnings per Share Indicate?

Sincere EPS divides a company's profit by its outstanding shares, the higher a company's EPS, the more likely it is to have extra profit to distribute to its shareholders as dividends. Furthermore, since EPS is a measure of profitability, a higher EPS could make a company's stock more attractive to investors, which could drive its share price up, resulting in capital gains for existing shareholders.

What Do Low Earnings per Share Indicate?

The lower a company's EPS, the less likely it is to distribute some of its profits to its shareholders as dividends. Moreover, low earnings could make a company less attractive to investors, which could leave its stock price stale or even drive it down.

Will Earnings per Share Be Negative?

In the event that a company has negative income, its EPS can be negative. Typically, negative earnings are not a decent sign. For newer businesses, however, a few years of negative earnings can be normal. Startups and other youthful businesses in growth phases often need to borrow money to gain market share.
This can easily result in negative income, which isn't necessarily something terrible. Expecting a company's management is utilizing borrowed money wisely and has a plan to become profitable in the foreseeable future, a youthful company with negative earnings can in any case be a wise investment.
All assuming that a more mature company that has had positive earnings in the past reports negative earnings for a long time, however, this could indicate that they are losing market share and might be headed for bankruptcy, which could cause their stock to lose its value.

What Are the Limitations of Earnings per Share?

EPS is independent of share price, so it isn't particularly useful in determining whether a company's stock is trading at, above, or below fair value. Moreover, since EPS depends on outstanding shares, the metric can be inflated easily on the off chance that a company leads a stock buyback to decrease the number of shares in circulation.
Conversely, in the event that a company directs a stock split to increase its shares outstanding while lowering its share price, EPS can drop decisively without a genuine change in earnings.

When and Where Do Companies Report Their EPS?

Publicly traded companies report their EPS quarterly and annually when they file their income statements with the Securities and Exchange Commission (SEC). Company filings can be searched and accessed through the SEC's website.

Highlights

• Businesses with simple capital structures, where just common stock has been issued, need just release this ratio to reveal their profitability.
• Essential earnings per share (EPS) tells investors the amount of a company's net income was allotted to each share of common stock.
• Companies with a complex capital structure must report both essential EPS and diluted EPS to provide a more accurate picture of their earnings.