Video Lesson
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What Is EPS?
Earnings Per Share (EPS) is a company's net profit divided by its total number of shares outstanding. If a company earns $1 billion and has 500 million shares, its EPS is $2.00. This per-share figure lets investors compare profitability across companies of different sizes and is the denominator in the most widely used valuation metric: the P/E ratio.
Basic EPS vs Diluted EPS
Basic EPS uses only currently outstanding shares. Diluted EPS accounts for all potential shares — stock options, warrants, and convertible bonds that could become shares. Diluted EPS is always lower than or equal to basic EPS. Analysts and investors always use diluted EPS — it's the conservative, worst-case figure and the standard for P/E calculations.
GAAP EPS vs Adjusted EPS
Companies report two versions. GAAP EPS follows strict accounting rules and includes every expense, including one-time charges. Adjusted EPS strips out these items to show recurring earning power. Both are useful, but scrutinize large, consistent gaps between GAAP and adjusted — a company that regularly excludes significant costs from adjusted EPS may be obscuring the true earnings picture.
EPS Growth: What Investors Really Watch
A company growing EPS at 15% annually is compounding shareholder value consistently. Each quarter, Wall Street analysts publish consensus EPS estimates. When a company beats that estimate, the stock often rises. When it misses, the reaction is typically swift and painful. The surprise relative to expectation often moves the stock more than the absolute earnings number itself.
EPS and the P/E Ratio
EPS is the denominator in the P/E ratio. A stock at $50 with EPS of $2.50 has a P/E of 20. If EPS grows to $3.00 and the price stays the same, the P/E falls to ~17 — the stock is now cheaper on earnings. Growing EPS can make a stock more attractive even without a price change, which often eventually pulls the price higher as investors recognize the improving value.