What is Earnings Per Share?

What is Earnings Per Share (EPS), and why do I focus on it?

Earnings per share is simply stated the earnings of a company divided by the number of shares(stocks) available to the public.  For example if a company earned 20 million dollars last year and has 40 million stock shares available to trade or invest, the EPS would be $0.50. Generally speaking the higher the EPS, investors consider it to be a better investment.

EPS is a commonly used term because it allows you to compare companies of different sizes and determine their values as an investor. One company may have earnings of 1 million dollars and another 2 million dollars but depending on how many stock shares are available, the company with 1 million dollar in earnings may be a better investment when you calculate EPS.

In this example, if the company with 1 million dollars in earnings has 1 million shares outstanding, that means available to the public, then the company would have an EPS of $1.00. If the company with 2 million dollars in earnings has 4 million shares outstanding, the EPS for this company would be $0.50. In this scenario the company would have less earnings and may be considered to be a better investment. Obviously there are other factors, but this is one example of how EPS allows you to compare companies in a more objective way.

Other things that I look for include if EPS is growing, or accelerating. You want to see it growing because that confirms that the company is earning more and generally means it is growing. That usually means investors will want to own it and that usually leads to buyers that drive the price of the company higher. Bill O’Neill at Investors Business Daily has done great work on this topic and shows that rising EPS is one factor that investors should use to make investment decisions.

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