Earnings per Share (EPS) is a company’s net profit divided by the number of shares outstanding. It’s one of the numbers that Wall Street watches most closely. Wall Street has “expectations” for many companies’ EPS, and if the expectations aren’t met, the share price is likely to drop.
The formula to calculate earnings per share is:
*Note: Watch for the difference in reporting of numbers, at the top of the income statement it says “In millions, except number of shares which are reflected in thousands and per share amounts.” To calculate EPS you will need to add 0’s to the net income number so the numbers match.
(Excerpts from Financial Intelligence, Chapter 25 – The Investor’s Perspective)
EPS is often the first number companies report to investors in their quarterly earnings calls. It is simply the company’s net income for the quarter or year divided by the average number shares outstanding during the period.
Investors expect increases in EPS over time, just as they do with revenue. Other things being equal, a growing EPS presages an increasing stock price. During an economic slowdown, revenues might fall, but most companies try hard to keep EPS up by reducing costs. Shareholders can accept revenue declines during a slump, but they don’t like to see a drop in EPS.