Earnings Per Share
Earnings per share (EPS) is a financial metric used to show the overall profitability of a single company. EPS is calculated by dividing the company's profit divided by the number of outstanding shares of its common stock.
It is normal for companies to highlight EPS and revenue numbers when they report earnings. Businesses also tend to report adjusted EPS numbers, which is usually an EPS number adjusted for some extraordinary items (options, warrants, convertible debt).
In general, the higher the EPS the more profitable the company is and vice versa. However, it would be a mistake to look at a single EPS value of a certain company. This is why analysts tend to analyze the company’s EPS numbers against other companies in the same sector.
EPS is also used to calculate the P/E ratio, which is one way of valuing the business. The higher the P/E ratio is, the more expensive shares are considered to be.
During the earnings season, earnings “beats” and “misses” are based on the EPS estimates. Research firms tend to survey analysts and incorporate their EPS estimates into the model, which then calculates the EPS estimates, also known as EPS consensus. A higher-than-consensus reading can send shares of the given company higher following the earnings report, and vice versa.
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