What is EPS?

Key Takeways

• The income per share is the net profit or loss that the common shareholders can enjoy or bear for each share they hold.

• The application of earnings per share includes finding blue chip stocks, judging the growth of companies, and so on.

• The defects of earnings per share include failure to reflect corporate risk, inability to distinguish relative valuations, and so on.

Detailed explanation of concept

EPS is the abbreviation of Earning Per Share, that is, earnings per share, which is the net profit or net loss that ordinary shareholders can enjoy or have to bear for each share they hold. It is calculated by dividing the net profit by total share capital (excluding preferred share capital and its dividends).

Earnings per share is usually used to reflect the operating results of enterprises and to measure the profit level of common shares. It is an important index for investors to evaluate corporate profitability, predict corporate growth potential, and then make investment decisions.

Take Apple Inc as an example, its net profit in 2020 is 94.68 billion US dollars, and its total equity is 16.4 billion shares, then EPS=946.8/164=5.77 US dollars.

Application of EPS

Distinguish between blue chip stocks and junk stocks

Investors can distinguish between so-called "blue chip stocks" and "junk stocks" by earnings per share. Generally speaking, earnings per share of blue chip stocks are growing steadily, while earnings per share of junk stocks are unstable and even often suffer losses.

Looking for leading enterprises

Investors can choose leading enterprises by horizontally comparing the earnings per share of companies in the same industry. In most cases, the earnings per share of leading enterprises are also in the forefront.

Judge the growth of a company

Investors can judge the growth of the company by vertically comparing the earnings per share of the stock. If the earnings per share grow continuously and rapidly, it means that the growth of the company is very good.

Limitations of EPS

1. Earnings per share can not reflect the risk of the enterprise. Companies with high earnings per share may have a higher level of debt, or it may be because of higher one-time returns such as investment income.

2. Earnings per share is an absolute value, which can not distinguish the relative valuation between different enterprises. the valuation of companies with high earnings per share is not necessarily low.

3. High earnings per share does not mean high dividend, but also depends on the company's dividend distribution policy.