Earnings per share (EPS) is a financial metric investors use to measure how much profit a company is making per share of common stock outstanding, after taking into consideration the amount of preferred stock dividends paid out during the year. You can also use changes in EPS over time to determine how quickly the EPS is changing and whether the company is becoming more profitable or less profitable for shareholders. By calculating the change in EPS as a rate rather than a raw number, you can better compare companies of different sizes.
Calculating EPS Growth Rate
Once you know how to calculate EPS for a company, you can calculate the EPS growth rate. First, subtract the initial EPS from the final EPS. Second, divide the change in EPS by the initial EPS. Finally, multiply the result by 100 to calculate the EPS growth rate as a percentage.
For example, say you want to calculate the EPS growth rate for a company over the past year. The EPS one year ago was $2.00 per share, and today it’s $2.08 per share. Subtract $2.00 from $2.08 to find EPS has increased by $0.08 over the past year. Then, divide $0.08 by $2.00 to get 0.04. Finally, multiply 0.04 by 100 to determine that the EPS growth rate over the past year is 4 percent.
The EPS growth rate can also be negative. For example, if the EPS one year ago was $2.00 and now it's only $1.92, subtract $2.00 from $1.92 to get negative $0.08. Divide negative $0.08 by $2.00 to get negative 0.04. Finally, multiply negative 0.04 by 100 to determine that the EPS growth rate is negative 4 percent.
Importance of EPS in Investing
Breaking the company's earnings down to a per share level is particularly useful when deciding whether to purchase a stock at a specific price because it allows you to see how much profit the company has earned in the past for each share outstanding. For example, say Company A and Company B are both selling for the same price per share. If Company A has $10 billion of net income and Company B has $5 billion of net income, Company A might seem like the better investment. However, if Company A has 10 million shares outstanding and Company B has 1 million shares outstanding, then Company B has the higher EPS, meaning each share you buy of Company B has a higher profit per share than the shares of Company A.
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