Earnings per share (EPS)

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    The earnings per share (EPS) determine a company’s profit as allocated to each outstanding share. EPS is important for stock traders because it is considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price to earnings ratio (P/E).

    EPS is calculated using the following formula:

    Earnings per share formula

    For example, if a company has a net income of $20 million, pays out $1 million in preferred dividends, has $10 million in outstanding shares in the first half of the year and $5 million shares outstanding in the second half of the year, the earnings per share is as follows:
    Earnings per share

    That means the company has an EPS of $2.53. Compared to other competitors in the industry, if this value is higher, it typically means they are more desirable for investment. However, this depends on how they achieved these earnings. You should consider investing if the higher earnings are based on an increase in revenue; you should reconsider investing if the higher earnings are based on extraordinary events or the selling of assets.
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