Earnings per Share allows us to compare different companies’ power to make money. It is the portion of a company’s profit allocated to each outstanding share of common stock. A positive trend of EPS shows that the company is finding more ways to make more money.

Earnings per Share can be calculated by subtracting the dividends on preferred stock from net income, and dividing the result by the outstanding shares.

This gives you a number you can use to compare the earnings of companies since it is unlikely any two companies will have the same number of shares outstanding. The higher the earnings per share with all else equal, the higher each share should be worth.

EPS = Net Earnings / Outstanding Shares


For example, companies A and B both earn $100. Company A has 10 shares outstanding, while company B has 50 shares outstanding.

In this case, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10).

In the case of Company B, it had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).

We can see that investing in company A would be a better choice.