What is EPS?

EPS is earnings per share, or the part of the company's profit that is attributed to each individual share of stock. EPS is a good indicator of a company's profitablility, and is a very important metric to look at while evaluating a certain stock.

The formula for EPS is below.

(Net income - Dividends on Preferred Stock) / (Average Outstanding Shares)

You may wonder why average outstanding shares is used instead of a single number. The reason is that EPS is reported over a certain period of time, and the number of outstanding shares will likely fluctuate in that period, so you can get a more accurate result by using the average number of oustanding shares.

EPS is considered by most investors to be the single most important metric to use when evaluating a stock. However, some aspects of EPS can be misleading when comparing two different companies. For example, one company could use twice as much capital to generate the same amount of profit as another, but it is obviously not utilizing its capital as efficiently as the other company. However, these numbers are not reflected in the EPS, so it is important to do your research on many different metrics when evaluating a company.

There are many different types of EPS indicators used by companies. However, the two most important ones are called trailing EPS and rolling EPS. They are very easy to learn and understand. Trailing EPS is the sum of the company's EPS for the past four quarters, or one year. Rolling EPS is the sum of the EPS for the past two quarters along with the the estimated EPS for the future two quarters, so it also spans a year.

The following is an example graph of EPS, for the S&P 500 index from 1988 to 2002. The EPS for the entire S&P is a good indicator of how the economy is doing as a whole, since the EPS is essentially the profitability of a company.

 

 

 

(From Yahoo! Finance, February 23, 2003)