Aug 22 · 1 min read
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When looking at the summary statistics of a stock, you will often see Earnings Per Share or simply EPS. EPS is a measurement of how much profit a company has made in a quarter or year in relation to how many shares they have in the stock market. In simpler terms, EPS is a measure of how profitable a company is on a quarterly or yearly basis.
EPS is calculated by taking a company’s net income for the past quarter or year, subtracting dividends paid on preferred stocks, and dividing by the average number of outstanding shares. EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares Don’t worry about calculating the EPS yourself though. Most stock trading apps show a company’s EPS in the summary statistics of a stock’s profile. Thank you technology!
If you were trying to decide on whether to invest in Mark’s or Maya’s robot company, you might decide to calculate each stock’s EPS. If Mark’s robotics company reported $1,000,000 in profit, $100,000 in dividend payments, and 180,000 outstanding shares, the EPS would be $5. If Maya’s robotics company reported $3,000,000 in profit, $200,000 in dividend payments, and 700,000 outstanding shares, the EPS would be $4. Even though Mark’s company earned less, it has a higher EPS.
Unfortunately, EPS alone will not show you which stock is a better investment. EPS’ main value comes from being able to use it in formulas of other ratios, like the Price-To-Earnings (P/E) or Price-To-Earnings-Growth (PEG) Ratio, that will allow you to compare companies within the same industry.
Stocks: The Basics