Earnings-per-share, or "EPS", is one of the most widely used ways to gauge company profitability. To calculate, divide the company’s profits by the number of outstanding shares.
EPS matters because strong earnings tend to drive the price-per-share up, and that’s good for investors. Earnings also generate money the company can re-invest in growth.
But, EPS has limitations.
If a company uses earnings to buy back shares of its own stock, there are fewer outstanding shares in the equation. That drives the EPS up, without any actual increase in earnings.
EPS also doesn’t consider outstanding debt, OR, that two companies might have the same EPS, but one company used less capital to generate the same profits—indicating it might operate more efficiently.
So, while EPS is a fundamental factor in assessing stock value, it’s most useful when considered along with other metrics.
