10-Second Take:
Earnings per share (EPS) show a company’s profit broken down to a single share of stock. Observing EPS can be useful for assessing a company’s profitability compared with analysts’ expectations and other companies’ financial performances.
What it means:
By taking the total earnings of a corporation and dividing them by the number of shares outstanding (preferred shares are removed for this equation), you get a handy tool to help assess a company’s financial performance.
However, rather than consider a company’s current EPS in isolation, it may be more relevant to look at its year-over-year change. Ideally, the EPS value will increase annually, and the rate at which it increases can give you an indication of relative performance as well. During earnings season — that’s the quarterly cycle in which companies report earnings results to shareholders — investors typically watch to see if earnings have met the expectations that research analysts previously declared. Stock watchers generally look to see if earnings missed, met or exceeded analysts’ expectations. Stocks have been known to rise or fall sharply on the tail of unexpected results. Ultimately, investors should consider what their long-term goals and objectives are for their stock positions as quarterly earnings are only one factor in determining a stock’s ongoing suitability.
Earnings per share may be especially useful when considered along with other metrics. In addition to EPS, you can also look at a company’s price/earnings (P/E) ratio and the stock’s return on equity (ROE). To learn more about some metrics that matter, you can read How I learned to love metrics.
