Earnings per Share Question 1

Methodology

Stocks

Module 1

The earnings per share (EPS) calculation is used by investors to figure out what?

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Earnings per Share

Earnings per share is a calculation that investors use to work out how much a company earns, for every share that they have outstanding. It is a useful measure for investors as it gives them an idea of how they can expect to earn from their investment.

For example, if an individual invests $100 into a stock, with the company earning $50 per share in a given year, it would be considered to be a fantastic investment. Likewise, if the company earns just $0.50 per share in a given year, it would be considered to be a terrible investment.

To calculate the earnings per share of a company, you just need to divide the earnings of that company by the number of shares that they have outstanding. If you do not know what the number of shares outstanding is for a particular company, then you can use the market capitalisation instead. So, if a company earns $5m and has 500k shares outstanding, the earnings per share figure would be $10.

Luckily, the earnings per share figure of a company is usually given to you when you look up the price of a stock. It will usually be written using the acronym ‘EPS’.

Whether an EPS figure is attractive or not, depends upon the share price of a company. For instance, an EPS of $1 would be great if the share price was $1, but it would be horrendous if the share price was $1000.