Trillionaire Term of the Day - January 6, 2009

Earnings per Share

A company’s Earnings per Share (EPS) is the amount of income a company makes per share outstanding.  EPS serves as an indicator of a company’s profitability.  To find EPS, you have to divide the company’s profit by the number of shares outstanding.

Profit/Income

---

Total Shares

EPS is widely considered to be one of the most important variables in determining a company’s share price and ultimate true value.  A company with a higher EPS makes more profit per share outstanding than another company with a lower EPS. 

For example, a company that has a net income of $1 billion and has 500 million shares available to the public will have an EPS of 2.  This simply means that the company makes $2 for every share that it makes available to the pubic.  It seems logical, then, that if company A had an EPS of 3 and company B had an EPS of 1, if all other factors were held equal, that company A would be the more profitable company, and probably the better investment. 

Another important factor to look at when analyzing a company’s EPS is the historical EPS growth.  If a company’s EPS has been growing at a solid rate of 20% for the past 5 years, it would definitely be considered a fast-growing company, and it might be an even better investment than a competing company that has a slightly higher EPS but a much lower historical EPS growth rate. 

Tomorrow, we will discuss an extremely important ration called the P/E ratio.  The P/E ratio is a great complement to EPS, and it will allow you to judge a company’s value even better.