Have you ever wondered how to know if a company is doing well before buying its shares? One of the most important things investors look at is Earnings per Share (EPS). It is a simple but powerful number that tells you how much profit a company is making for each share you own. If you want to make smart decisions in the stock market, understanding EPS is a must. Let’s understand in very easy way.
What is EPS in Stock Market?
EPS (Earnings per Share) is the portion of a company’s profit given to each share of its stock. It tells you how profitable a company is. The higher the EPS, the better the company is usually doing.
How is EPS Calculated?
The formula for EPS is:
EPS = (Net Profit – Preferred Dividends) / Total Number of Shares
- Net Profit: The total profit the company made in a period (usually one year).
- Preferred Dividends: Some companies pay fixed returns to preferred shareholders before giving anything to normal shareholders.
- Total Number of Shares: All the shares owned by public shareholders.
Example of EPS (Earnings per Share)
XYZ Power Ltd. (With Preferred Dividends)
- Net Profit after Tax = ₹2,000 crore
- Preferred Dividends = ₹200 crore
- Equity Shares Outstanding = 250 crore shares
EPS = (₹2,000 – ₹200) / 250 = ₹1,800 / 250 = ₹7.20
👉 XYZ Power Ltd.’s EPS (Earning Per Share) = ₹7.20
Why is EPS Important?
- Compare Companies: EPS helps you compare which company is more profitable.
- Helps in Decision Making: A growing EPS means the company is improving, which is a good sign for investors.
- Used in Valuation: EPS is used in calculating P/E ratio (Price to Earnings), which tells if a stock is expensive or cheap.
Types of Earnings per Share (EPS)
- Basic EPS – Simple calculation using current shares.
- Diluted EPS – Includes future possible shares like from stock options or bonds. It gives a more accurate picture.
Conclusion
EPS is not the only factor to look at, but it is a very useful tool for understanding how much a company is earning for each share. If you are new to investing, learning about EPS can help you choose better stocks and grow your money wisely.