EPS Explained: Earnings Per Share and Why It Matters

What Is EPS and Why Investors Care

Earnings per share (EPS) is the amount of net income a company earns for each share of stock outstanding. If Microsoft earned $72.74 billion in net income in its 2023 fiscal year and had roughly 2.4 billion shares outstanding, each share "earned" about $30.34. That's EPS.

This metric matters because stock prices ultimately reflect expectations about future profits. EPS connects the company's total earnings — a figure in the billions that's hard to visualize — directly to shareholder returns. When management tells you they increased EPS by 15%, you're hearing that they made the business more profitable per share in your hands.

Wall Street's entire equity research apparatus is built on EPS forecasting. Analysts publish "EPS estimates" for the next four quarters. Earnings "beats" (actual EPS exceeding forecasts) drive stock rallies. Earnings "misses" trigger selloffs. On a macro level, the S&P 500's P/E ratio expands or contracts based on consensus EPS growth expectations.

How to Calculate EPS: The Formula

Basic EPS Formula

The calculation is straightforward:

EPS = Net Income ÷ Weighted Average Shares Outstanding

Let's work through a real example. Apple reported $99.8 billion in net income for fiscal 2023 with a weighted average of 15.6 billion shares outstanding. Their basic EPS: $99.8B ÷ 15.6B = $6.40.

The "weighted average" part matters because companies issue or repurchase shares throughout the year. A company that repurchased 100 million shares in Q4 shouldn't count those shares for the full year in denominator calculations. Weighted average shares adjust for timing.

Diluted EPS: The Conservative Number

Companies also report diluted EPS, which includes the impact of convertible securities (stock options, warrants, and convertible bonds). When an employee exercises stock options or a bondholder converts their bonds to equity, your ownership gets diluted.

For Apple, diluted shares came to 15.8 billion (slightly higher than basic shares due to options). Their diluted EPS: $99.8B ÷ 15.8B = $6.31.

Always use diluted EPS when comparing companies. It's the more conservative and realistic figure, and it's what Wall Street consensus estimates typically reference. When you see "Apple's EPS is $6.31," they're quoting diluted EPS.

Adjusted EPS: The Controversial Metric

Many companies also report "adjusted" or "non-GAAP" EPS, which excludes one-time charges or stock-based compensation. Adjustments might remove restructuring costs, legal settlements, or goodwill impairments.

The danger: companies use adjustments to make results look better. Meta reported GAAP EPS of $2.73 in 2023, but their adjusted (non-GAAP) EPS was $4.97 — the adjusted figure excluded stock compensation and other items. While some adjustments are reasonable, always cross-check against GAAP earnings to see what's actually being excluded. Stick with GAAP EPS and diluted shares for fundamental analysis unless you have specific reason to adjust.

EPS vs. Profitability: Understanding the Relationship

Why EPS Can Rise While Profits Fall

This is where many investors get tricked. A company's net income can stay flat or even decline while EPS climbs. How? Share buybacks.

Imagine Company X earns $100 million and has 100 million shares outstanding. EPS = $1.00. Next year, earnings stay at $100 million, but the company buys back 10 million shares, leaving 90 million shares. New EPS = $100M ÷ 90M = $1.11. EPS rose 11% despite zero profit growth.

This isn't inherently evil — buybacks can be shareholder-friendly when stock is undervalued. But Wall Street sometimes lauds EPS growth that's purely mechanical. Always compare EPS growth to revenue growth and net income growth. If EPS is rising but revenue is flat or falling, you're looking at share count reduction, not operational improvement.

When EPS Falls But Business Improves

The reverse also happens. During stock offerings or acquisitions, share count increases. If a company acquires another firm by issuing 20 million new shares, EPS might drop even if the combined entity is more profitable in absolute dollars.

In 2016, the pharmaceutical firm Valeant (now Bausch + Lomb) had a crisis where net income collapsed due to accounting issues and pricing controversies. EPS fell from $7.89 in 2014 to a loss of $15.54 in 2016. Unlike the buyback scenario, this reflected genuine business deterioration. But the lesson holds: always trace EPS backward to the actual fundamentals.

Real-World EPS Examples: What Investors Actually See

Growth Stock Example: NVIDIA

NVIDIA demonstrates explosive EPS growth during the AI boom. Their diluted EPS:

• Fiscal 2022: $0.63
• Fiscal 2023: $2.42
• Fiscal 2024: $15.04

That's 24x growth in two years. NVIDIA's stock price didn't multiply by 24, but the EPS expansion gave the market permission to re-rate the valuation multiple upward. The stock went from trading at ~60x forward earnings in 2023 to ~30x forward earnings by early 2024, yet shares still tripled because the underlying EPS grew so dramatically.

Value Stock Example: Berkshire Hathaway (BRK.A)

Warren Buffett's company reported earnings per Class A share:

• 2021: $24,715
• 2022: $30,745
• 2023: $18,479

The 2023 decline reflects portfolio mark-to-market accounting; Berkshire's underlying operating earnings were stable. The EPS figure includes unrealized investment gains and losses, which is why value investors often look beyond reported EPS to operating performance. Berkshire's stock barely moved while EPS declined 40% because shareholders understood the underlying business remained solid.

Dividend Stock Example: Coca-Cola (KO)

Coca-Cola demonstrates consistent, predictable EPS:

• 2020: $2.25
• 2021: $2.43
• 2022: $2.38
• 2023: $2.85

Growth is modest (roughly 3-5% annually) but dependable. The company returns much of EPS as dividends to shareholders. An investor buying KO at $60 with $2.85 EPS is paying 21x earnings for stable, slowly-growing profits with a 3% dividend yield. That's the dividend stock value proposition: steady EPS, meaningful yield, lower volatility.

Using EPS in Valuation: P/E Ratio and Price-to-Earnings Growth

The Price-to-Earnings Ratio

EPS becomes actionable when compared to stock price. The P/E ratio divides share price by EPS:

P/E Ratio = Stock Price ÷ Earnings Per Share

If Tesla trades at $250 with trailing twelve-month EPS of $2.60, the P/E ratio is 96x. That means investors pay $96 for every $1 of annual earnings. For context, the S&P 500 average trades around 18-22x earnings. Tesla's high multiple reflects growth expectations; the market believes Tesla will grow earnings much faster than mature companies.

A low P/E can signal undervaluation or a "value trap" (a bad business deserving its low multiple). Ford traded at 5x earnings in 2021 because investors doubted its electric vehicle transition. A high P/E can signal growth potential or overvaluation. Neither number is universally "good" — you must compare P/E ratios within industries and against growth prospects.

Price-to-Earnings Growth Ratio (PEG)

The PEG ratio adjusts for growth:

PEG = P/E Ratio ÷ Expected Annual EPS Growth Rate (%)

If a company's P/E is 40x and analysts expect 40% EPS growth, the PEG is 1.0 — fair value. If the same company trades at 40x but is expected to grow EPS only 10%, the PEG is 4.0 — possibly expensive.

PEG ratios below 1.0 often signal undervalued growth stocks. But they're only as good as your growth assumptions. In 2021, many unprofitable tech stocks had no meaningful PEG because they had negative earnings; the metric doesn't work for loss-makers.

EPS Growth Rates: The Engine of Returns

Historical research shows that long-term stock returns correlate strongly with EPS growth. If a company grows earnings 10% annually for a decade and maintains its valuation multiple, shareholders see roughly 10% annual returns.

This is why analysts obsess over "earnings growth." When Meta trades at 22x forward earnings with 20% expected EPS growth, the market is pricing in the growth. If earnings growth slows to 10%, the multiple typically contracts to 15-18x, and the stock sells off even if absolute profits grow.

Comparing Growth Rates Across Time Horizons

The most reliable EPS metric for fundamental analysis is 3-5 year growth. It smooths out one-time items and cyclicality. A company that grew EPS at 12% annually over five years but is expected to slow to 5% has a different investment profile than a company accelerating from 5% to 12%.

Common EPS Pitfalls and Mistakes to Avoid

Mistake #1: Ignoring Dilution

Always use diluted EPS. Basic EPS excludes options and convertible securities, inflating the per-share number. A company with massive stock compensation programs can report impressive basic EPS while diluted EPS lags badly. Compare diluted EPS across companies for apples-to-apples analysis.

Mistake #2: Confusing EPS with Cash Flow

A company can report positive EPS (using accrual accounting) while burning cash. Conversely, a profitable company investing heavily in equipment might show lower EPS but generate positive free cash flow. EPS tells you about profits; cash flow earnings tells you about cash. Both matter.

Enron reported $1.38 EPS in 2000 while its cash flow deteriorated — a massive red flag missed by many investors. Always cross-check EPS against operating cash flow from the cash flow statement.

Mistake #3: Trusting Adjusted/Non-GAAP EPS Uncritically

Companies love non-GAAP metrics because they can exclude inconvenient charges. Meta excludes billions in stock compensation from adjusted EPS. Intel excludes restructuring costs. While some adjustments are fair (one-time settlements, for instance), a company adjusting away the same items every quarter is hiding underlying weakness.

The SEC allows non-GAAP reporting, but always compare to GAAP. If the gap between GAAP and adjusted EPS is widening, scrutinize what's being excluded.

Mistake #4: Assuming Constant Share Count

If a company's EPS grew 8% but net income grew only 2%, the difference came from share repurchases. That's not bad — returning cash to shareholders through buybacks can be efficient. But it's not revenue growth or margin expansion. Understand what drove EPS growth: business momentum or financial engineering.

Mistake #5: Using One Quarter's EPS to Judge a Business

A bad quarter doesn't mean bad business; a great quarter doesn't guarantee continuation. Seasonal businesses like retail see earnings swings. Cyclical industries like semiconductor manufacturing depend on chip cycles. Look at EPS trends over 8-12 quarters to see the underlying trajectory.

Mistake #6: Ignoring Industry Context

A 5% EPS growth rate is impressive for a mature, cyclical company like Ford. It's disappointing for a high-growth software company like ServiceNow. Compare EPS growth to peer companies and industry averages. An individual stock's growth rate only matters relative to what the market could invest in as an alternative.

EPS in Different Market Cycles

Bull Markets: Expanding Multiples and Rising EPS

In early bull markets (2009-2010, 2022-2023), both EPS and valuations expand. Companies grow earnings 15-20% while P/E ratios expand from 14x to 18x. Stocks can double even with single-digit EPS growth because the earnings stream is valued more highly.

The risk: late-cycle bull markets can see EPS deceleration. In 2021, many tech stocks saw valuations expand to 40-80x earnings even as EPS growth began slowing from 40%+ rates to 20-30%. The margin for disappointment widened.

Bear Markets: Contracting Multiples and Falling EPS

In downturns, both EPS and valuations contract. The S&P 500 fell 35% in 2022, with EPS expected to decline roughly 5-8% (a double hit: falling earnings AND lower multiples). Companies cut guidance, hire freezes depress future growth, and consumer demand softens.

During the 2020 COVID crash, many companies suspended guidance altogether because EPS forecasts became meaningless overnight. EPS matters less when the fundamental business trajectory is uncertain.

Recessions: Watch for Negative EPS

In severe recessions, companies report net losses (negative EPS). Banks saw this in 2008. Energy companies saw negative EPS in 2016 during the oil crash. Negative EPS makes P/E ratios meaningless — you can't compare negative numbers to valuation. In recessions, focus on balance sheet strength, cash reserves, and whether the company will survive, not EPS multiple arbitrage.

Where to Find EPS Data

Official Sources

• Company Earnings Reports (10-Q and 10-K filings): Filed with the SEC and available at sec.gov or the company's investor relations site. EPS figures are in the consolidated statements of income.
• Earnings Calls: Management reads the latest EPS during investor calls. Transcripts are available at seeking alpha and other transcript services.
• Investor Relations Pages: Most public companies publish earnings fact sheets with EPS trends.

Analyst and Financial Data Sites

• Yahoo Finance, Google Finance, Bloomberg Terminal: Display current EPS and forward EPS estimates.
• Seeking Alpha, Motley Fool, Zacks: Publish analyst consensus EPS estimates and earnings calendars.
• FactSet, Refinitiv (EIKON): Professional-grade EPS databases with historical data and adjustments.

For fundamental analysis, start with official SEC filings (they're the legal source). Cross-reference with consensus estimates on Yahoo Finance or Bloomberg. Never rely on a single source.

Practical Next Steps: Using EPS in Your Analysis

Step 1: Establish the EPS Baseline

Pull the last 8 quarters of diluted EPS. Plot them on a spreadsheet. Is there a clear trend (rising, falling, flat)? One-time charges usually show up as quarter-to-quarter volatility; look for the underlying trajectory.

Step 2: Calculate the Growth Rate

Compare TTM (trailing twelve-month) EPS to the same period a year ago. Calculate year-over-year percentage growth. Then calculate the 3-year CAGR. Which is higher? If growth is decelerating, the business may be maturing.

Step 3: Cross-Check Against Revenue and Free Cash Flow

Is EPS growth outpacing revenue growth? If so, margins are expanding — a positive sign if it's from operating leverage, a red flag if it's from accounting adjustments. Is EPS growing while free cash flow shrinks? That's a warning sign (accrual earnings ≠ cash reality).

Step 4: Compare the P/E to History and Peers

Calculate the current P/E ratio. Compare it to the stock's 3-year average P/E, the industry average P/E, and the S&P 500 average. Is the stock expensive relative to its own history and peers? Price alone doesn't matter; context does.

Step 5: Project Forward EPS (With Caution)

Use management guidance, analyst consensus, and your own industry assumptions to estimate next-year EPS. Apply the current P/E or a normalized P/E to that forward EPS to derive a target price. Remember: estimates are often wrong. Stress-test with bear and bull case scenarios.

Key Takeaways and Your Next Move

EPS is the bridge between company profit and shareholder value. It answers the question: "How much profit am I entitled to per share?" Higher EPS is good; growing EPS faster than competitors is better.

But EPS alone doesn't make a stock worth buying. A company can boost EPS through buybacks, accounting tricks, or one-time gains while the underlying business deteriorates. Always triangulate EPS against revenue, cash flow, and industry trends.

This article is part of Ticker Daily's Fundamental Analysis educational hub. Once you've mastered EPS, explore the related pieces on P/E ratios, free cash flow analysis, and balance sheet strength to build a complete fundamental framework. Strong investors don't pick stocks on EPS alone — they use EPS as the centerpiece of a broader valuation model.

Disclaimer: This article is educational and does not constitute investment advice. EPS analysis is one component of due diligence. Consult a financial advisor or conduct thorough research before making investment decisions.