What Is Earnings Per Share (EPS)?
What Is Earnings Per Share (EPS)?
Earnings per share tells you how much profit a company made for each individual share of stock. It's one of the most widely quoted numbers in investing, and it's the starting point for a lot of other calculations, including the Graham Number.
The idea behind it is simple. A company's total profit doesn't mean much on its own, since a company with a billion shares and one with a million shares can post the exact same total profit and be in completely different situations. Dividing profit by the number of shares gives you a number you can actually compare across companies, and one that tells you what your own slice of the pie is worth.
How It's Calculated
EPS = Net Income ÷ Shares Outstanding
Net income is the company's total profit after all expenses, taxes and interest have been paid, usually taken from the most recent quarterly or annual report. Shares outstanding is the total number of shares currently held by all investors, including institutions, insiders and the public.
Take a company that earned €50 million in net income last year, with 25 million shares outstanding:
€50,000,000 ÷ 25,000,000 = €2.00 per share
That €2.00 is what you'll usually see quoted next to a stock, and it's the same EPS figure that goes into the Graham Number formula.
Trailing vs Forward EPS
You'll often see EPS split into two versions, and it's worth knowing the difference because mixing them up changes your numbers.
Trailing EPS (sometimes written TTM EPS, for trailing twelve months) uses the actual reported profit from the last four quarters. It's based on real, already-published results, which is why it's the version used in the Graham Number and in most conservative valuation work.
Forward EPS uses analysts' estimates for the next twelve months instead of historical results. It's more useful for judging what the market expects going forward, but it's a forecast, not a fact, and forecasts get revised or missed.
What a Higher or Lower EPS Means
A rising EPS generally means a company is becoming more profitable on a per-share basis, which is usually a good sign. But EPS on its own can be misleading in a few common ways.
A company can grow EPS just by buying back its own shares, shrinking the share count, even if actual profit stays flat or falls. The per-share number goes up without the business getting any healthier.
EPS also says nothing about the price you're paying. A company earning €5.00 per share isn't automatically a better investment than one earning €0.50 per share, since it depends entirely on the share price relative to that number, which is exactly what ratios like the P/E ratio and the Graham Number are built to address.
And one-off events, an asset sale, a legal settlement, a tax adjustment, can distort a single year's net income and make that year's EPS look better or worse than the underlying business really is. It's worth checking whether a reported EPS figure includes anything unusual before treating it as a clean read on the company's normal profitability.
Nothing on this site is financial advice. It's a personal record of my own research and decisions, shared for transparency, not as a recommendation to buy or sell anything.