What Is EPS In Stock Market: Full Form, Formula & Significance

EPS stands for Earnings Per Share. It reflects how much profit a company earns for every share held by its equity shareholders. EPS helps shareholders and analysts compare businesses in a standardised way and forms the basis of many other valuation metrics in the market.

To understand it better, imagine two listed companies:
 

• Company A earns ₹30 crore in net profit and has 3 crore shares.
   
• Company B earns ₹30 crore but has only 1.5 crore shares.
   

To know which company provides more value to you as a shareholder, we need to calculate EPS. We will calculate EPS using the basic method (Net Profit ÷ Total outstanding equity shares):
 

From the above-mentioned table, we can see that, even though the total profits of both companies are the same, Company B provides more profit per share. This makes it potentially more attractive to investors.

In this blog, we will explore EPS in more detail, including its formula for calculation and its significance.

Types Of EPS

Earnings Per Share (EPS) is not a one-size-fits-all metric. Analysts use several EPS types to assess a company's profitability from multiple angles. The following table explains different types of EPS:
 

The above-mentioned EPS variants provide deeper insights into a company’s earnings quality, sustainability, and future growth strategy.

Formula Of EPS

Companies disclose two versions of EPS: Basic and Diluted. Both of these versions serve slightly different purposes in analysis.

1. Basic EPS

This is based on the actual quantity of equity shares held by investors.

Formula:

EPS = (Net Profit – Preference Dividend) ÷ Total Outstanding Equity Shares

Example:

ABC Company reported ₹5,00,00,000 net profit during the financial year. It has issued 50,00,000 equity shares and pays ₹20,00,000 as preference dividends.

Then,

EPS = (₹5,00,00,000 – ₹20,00,000) ÷ 50,00,000 = ₹9.6

It means shareholders earned ₹9.6 per share in that year’s profit.

2. Diluted EPS

Diluted EPS includes potential shares from convertible instruments like debentures, stock options, or warrants.

Formula:

Diluted EPS = (Net Profit – Preference Dividend) ÷ (Weighted Average Outstanding Shares + Potential Shares from Conversions)

Note on Weighted Average Shares:

If a company issues new shares or buys back existing ones during the financial year, it must use the weighted average number of shares, not the year-end total. This gives a more accurate picture of earnings per share over the entire year.

Example:

Assume the same net profit and preference dividend as above. Now, ABC company has 5,00,000 convertible debentures that can be converted into equity shares.

Total shares = 50,00,000 + 5,00,000 = 55,00,000

Diluted EPS = (₹5,00,00,000 – ₹20,00,000) ÷ 55,00,000 = ₹8.73

This highlights how diluted EPS includes potential future shares, offering a more cautious view of earnings.

Key Components Used In EPS Calculation

Each factor in the EPS calculation serves a specific function. The combination gives a true picture of the per-share earnings. 
 

EPS is based only on equity holders. So, you need to exclude preference shares in both profit and share count.

Significance Of EPS

EPS is more than just a calculation. It helps you understand how well the business is doing and what returns it’s generating for its shareholders

1. Indicates Profitability

A high EPS indicates that the company is earning more profit on each outstanding share. This attracts investors.

For example, if EPS increases from ₹12 to ₹18 in one year, then it reflects strong earnings growth.

2. Helps in Valuation

EPS helps determine valuation metrics such as the Price-to-Earnings (P/E) ratio used by investors.

P/E Ratio = Market Price per Share ÷ EPS 

A rising EPS and high P/E suggest a positive growth outlook. However, stable EPS with low P/E could suggest the stock is undervalued.

3. Tracks Company Progress

When EPS increases consistently year after year, it shows that the company is growing profitably. The following table shows an example of a comparison of yearly EPS growth of a firm:
 

The consistent increase in EPS shown in the above-mentioned table attracts long-term investors.

4. Comparative Analysis

As an investor, you can compare EPS across companies in the same sector. For example, suppose Tata Motors and Mahindra & Mahindra reports:

• Tata Motor’s EPS = ₹25
• Mahindra & Mahindra’s EPS = ₹18
   

Based on this, Tata Motors seems to earn more per share, assuming similar business models. Also, financial reports often show both basic and diluted EPS.

If Tata Motor’s basic EPS is ₹25 and diluted is ₹22, it indicates potential dilution from convertible instruments. This gives you a clearer view of actual earnings strength.

5. Predicts Future Growth

Stable EPS growth often points to long-term company expansion.

6. Influences Share Price

Strong quarterly EPS often leads to a rise in share price due to positive investor sentiment.

7. Assists in Dividend Decisions

A high EPS gives the company more flexibility to pay dividends.

For example, a firm with EPS of ₹25 and dividend per share of ₹10 has a payout ratio (dividend per share ÷ EPS) of 40%.

8. Assesses Management Efficiency

Steady growth in EPS reflects well on management’s ability to drive performance.

9. Used by Fund Managers

Portfolio managers consider EPS trends before deciding to buy, hold, or exit a stock.

The following table presents a clear picture of how EPS movement impacts investor decisions:
 

The above-mentioned table highlights how changes in EPS directly influence investor sentiment and play a key role in shaping stock price movements.

Conclusion

You have likely realised that earnings per share (EPS) is a fundamental measure investors use to evaluate a company’s overall performance and earnings strength. It simplifies the profit numbers and gives a clear idea of what each share earns. 

EPS is often relied upon to compare businesses in a sector, measure share value, and observe trends in company profits. 

However, EPS alone does not reveal everything about a company's performance. You need to view it with cash flow, revenue growth, debt levels, and overall business conditions.

FAQs

1. Can a company have negative EPS?

Yes, if it posts a net loss, EPS can be negative.

2. Is EPS the only metric for investment?

No, it should be used with other ratios and qualitative insights.

3. Can companies manipulate EPS?

Yes, through share buybacks or non-recurring gains, so the quality of earnings must be checked.

4. Is it a red flag if EPS is high but cash flow is low?

Yes, it might mean profits are on paper and not in hand. You need to look closer.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?