EPS stands for Earnings per share. That represents how much the company earns per share. That is a measure used in finance to evaluate a public company’s profitability and whether it is appropriately priced.

DefinitionEarnings Per Share (EPS) is a financial metric that measures the portion of a company’s profit allocated to each outstanding share of common stock. It is a fundamental indicator of a company’s profitability and is widely used by investors, analysts, and financial professionals to assess a company’s financial health and performance. EPS is typically calculated for different periods, such as quarterly and annually, to provide insights into a company’s earnings trends. It is an important component in various financial analyses and investment decisions.
Key ConceptsProfit Allocation: EPS represents the amount of a company’s net income (profit) that is attributable to each outstanding share of common stock. – Basic vs. Diluted EPS: There are two main types of EPS: basic EPS, which considers only outstanding common shares, and diluted EPS, which takes into account potential dilution from convertible securities and stock options. – Earnings Trends: EPS can help identify trends in a company’s profitability over time. Increasing EPS is generally seen as a positive sign, while declining EPS may raise concerns. – Investor Insights: Investors use EPS to evaluate a company’s earnings growth, compare it with competitors, and assess the return on their investment. – Multiple Measures: EPS is often used in conjunction with other financial ratios and metrics to gain a comprehensive view of a company’s financial performance.
CharacteristicsNumerical Indicator: EPS is expressed as a numerical value, typically in currency per share (e.g., dollars per share). – Periodic Reporting: Companies report EPS on a regular basis, such as quarterly and annually, allowing stakeholders to track changes over time. – Consistency: Consistent and accurate reporting of EPS is essential for investor trust and financial transparency. – Historical Data: Historical EPS data is often compared to current values to assess a company’s growth trajectory. – Adjustments: Diluted EPS accounts for the potential dilution of shares, providing a more conservative measure of earnings per share.
ImplicationsProfitability Assessment: EPS serves as a primary indicator of a company’s profitability. A higher EPS indicates higher profitability, which can be attractive to investors. – Investment Decisions: Investors use EPS to evaluate investment opportunities and make decisions about buying or selling stocks. – Comparative Analysis: EPS allows for comparisons between companies in the same industry or sector to identify leaders and laggards in terms of earnings. – Stock Valuation: EPS is a crucial component in stock valuation models and can impact a stock’s price and market performance. – Dividend Potential: Companies with higher EPS may have more capacity to pay dividends to shareholders. – Financial Health: A consistent and positive EPS trend is a sign of financial stability and health. On the other hand, declining EPS may raise concerns about a company’s financial performance.
AdvantagesSimplicity: EPS is a straightforward metric that is easy to calculate and understand. – Widely Used: It is a universally recognized and widely used measure of financial performance. – Comparability: Investors can compare EPS across companies and industries to make informed investment decisions. – Transparency: Regular reporting of EPS enhances financial transparency and helps build investor trust. – Investor Focus: EPS directly addresses the interests of shareholders by quantifying the earnings attributable to each share.
DrawbacksLimited Scope: EPS focuses solely on profit allocation and may not provide a complete picture of a company’s financial health. – Potential Manipulation: Companies may engage in earnings management to artificially inflate EPS, which can mislead investors. – Excludes Non-Common Shares: EPS does not account for preferred shares or other securities that may have a claim on a company’s earnings before common shareholders. – Short-Term Focus: Overemphasis on short-term EPS growth may lead to decisions that prioritize immediate gains over long-term sustainability. – Doesn’t Consider Quality of Earnings: EPS alone does not reflect the quality or sustainability of a company’s earnings, which can be important for investment decisions. – Not Always Comparable: Differences in accounting standards and practices can make EPS comparisons between companies challenging.
ApplicationsInvestment Analysis: Investors use EPS to evaluate the financial health and growth potential of companies and make investment decisions. – Financial Reporting: Companies are required to report EPS as part of their financial statements, ensuring transparency and compliance with accounting standards. – Valuation Models: Analysts and financial professionals incorporate EPS into various valuation models, such as the price-to-earnings (P/E) ratio. – Benchmarking: Companies compare their EPS with industry peers to assess their competitive position. – Performance Evaluation: Executives and boards of directors use EPS to assess a company’s financial performance and set strategic goals. – Communication Tool: Companies use EPS to communicate financial results to shareholders and the public.
Use CasesInvestor Decision-Making: An individual investor researching potential stock investments can use EPS to compare the financial performance of multiple companies and make informed investment decisions. – Financial Statement Analysis: A financial analyst reviewing a company’s annual report can analyze changes in its EPS over several years to identify trends and assess profitability. – Valuation Analysis: An investment banker calculating the fair value of a company’s stock may use EPS as a key input in valuation models. – Competitive Analysis: A business owner benchmarking their company’s performance against industry peers may examine EPS to gauge relative financial health. – Quarterly Earnings Releases: Media outlets and financial analysts report on companies’ quarterly EPS results to inform the investing public and assess market reactions. – Investor Relations: A public company’s investor relations team communicates its quarterly and annual EPS figures to shareholders and potential investors to demonstrate financial performance.

Connected Financial Concepts

Circle of Competence

The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 


Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Retail Investing

Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.

Profit vs. Cash Flow

Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.


Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Financial Modeling

Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Business Valuation

Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Financial Ratio



The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both. 

Financial Option

A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

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Read Next: Financial Accounting, Financial Ratios, Financial Options, Financial Structure, Cash Flows.

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