Investment word of the day: Earnings per share — what is EPS and why does it matter?

Investment word of the day: Earnings per share (EPS) is one of the key metrics used to evaluate a company's profitability. Investors check it to assess a company's financial health and estimate potential returns over a period of time.

What is EPS?

Earnings per share or EPS is the value of earnings per outstanding share of the total stock of a company. It shows the distribution of profit in each share of the company, giving a detailed view to a shareholder. An important metric to gauge a company's performance, a higher EPS shows increased profitability.

How to calculate EPS?

The formula to calculate EPS is — (net income - preferred dividends) / shares outstanding.

For example, if a company's net profit is ₹52 lakh and ₹2 lakh will be deducted as preferred dividends, while the outstanding shares are 1 lakh, then EPS will be — 52,00,000-2,00,000/ 1,00,000 = ₹50 per share.

Why EPS matters?

EPS helps to streamline complex financial information into a single value.

“Earnings Per Share (EPS) is a very important parameter for every investor, specifically in the rapidly evolving world of Indian finance of 2025. For retail investors, who now constitute over 40 per cent of the market (according to SEBI, 2024), EPS is a measure that reduces a multitude of complex financial information into a single, easily comparable data point across various sectors of the economy,” according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

Having a high EPS will have an impact on the stock prices as well.

“In general, consistently rising EPS points to stronger financial health and operational efficiency, which when turned to confidence, causes a stock price boom. Also, it affects the Price to Earning (P/E) ratio greatly since a negative or low EPS is bound to make a stock most likely overvalued,” according to Abbhinav R Jain, Co-founder & Chief Financial Officer, AdCountyMedia.

“In addition, companies with a more significant increase of EPS are more capable to be long-term investors as they will increase stock appreciation and dividends for shareholders,” he added.

Checking EPS over a period of time helps investors determine a company’s growth potential, stability, and ability to generate returns.