What Is Earnings Per Share (EPS) and Why Does It Matter for Investors?

Example:

Original:

Stock price: $100
EPS: $5
P/E: 20

After earnings growth:

Stock price: $100
EPS: $10
P/E: 10

The company now generates more profit relative to its stock price.

Different Types of EPS

Investors may encounter several types of EPS when analyzing stocks.

1. Basic EPS

Basic EPS uses the simple calculation:

Net Income ÷ Outstanding Shares

It does not consider potential future shares.

Example:

A company has:

Net income: $50 million

Shares:

10 million

Basic EPS:

$5 per share

2. Diluted EPS

Diluted EPS considers the possibility that additional shares could be created through:

• Stock options
• Convertible bonds
• Employee stock programs

Because more shares reduce earnings per share, diluted EPS often provides a more conservative measurement.

Example: