What is Earnings Per Share (EPS)

Earnings Per Share (EPS)

If you are learning stock market fundamentals, one of the most important terms you’ll come across is Earnings Per Share (EPS). It is one of the most widely used indicators to measure a company’s profitability and is closely watched by investors, analysts, and regulators.

In this blog, I will explain what EPS means, why it is important, how to calculate it step by step with examples, different types of EPS, and how you can use EPS while investing in Indian stocks. By the end, you will have a clear understanding of EPS and how it affects stock prices.


What is Earnings Per Share (EPS)?

EPS stands for Earnings Per Share. It tells us how much profit a company is making for each outstanding share of its stock. In simple terms:

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

Think of it like this: If a company earns ₹100 crore in profit and has 10 crore shares, then each share is entitled to ₹10 of earnings.


Why is EPS Important?

  1. Indicator of profitability – Higher EPS means the company is making more money per share.
  2. Comparison tool – You can compare EPS of different companies in the same sector.
  3. Valuation metric – EPS is used in calculating Price-to-Earnings (P/E) Ratio, another key valuation ratio.
  4. Investor confidence – Companies with rising EPS usually see their stock prices increase.


Formula for EPS

The basic formula is:

EPS = (Net Profit – Preference Dividend) ÷ Number of Equity Shares

Where:

  • Net Profit = Profit after tax (PAT) from the income statement.
  • Preference Dividend = Dividends payable to preference shareholders (if any).
  • Equity Shares = Outstanding common shares in the market.


Example 1: Simple EPS Calculation (Indian Company)

Suppose Infosys Ltd. reported the following numbers in FY 2024:

  • Net Profit (PAT): ₹25,000 crore
  • No preference shares → Preference Dividend = ₹0
  • Outstanding equity shares: 415 crore

Now,

EPS = ₹25,000 ÷ 415

EPS = ₹60.24 per share (approx.)

This means for every Infosys share you own, the company earned around ₹60 in FY 2024.


Example 2: EPS with Preference Dividend

Let’s say a company, ABC Cement Ltd., has the following data:

  • Net Profit (PAT): ₹1,200 crore
  • Preference Dividend: ₹200 crore
  • Equity Shares: 100 crore

EPS = (₹1,200 – ₹200) ÷ 100

EPS = ₹1,000 ÷ 100 = ₹10

Here, although the company made ₹1,200 crore, only ₹1,000 crore is available for equity shareholders, so EPS = ₹10.


Types of EPS

EPS is not always straightforward. Analysts often calculate different types of EPS to get a more accurate picture.


1. Basic EPS

This is the simplest calculation using the above formula. It does not consider any potential dilution (like convertible bonds, stock options, etc.).


2. Diluted EPS

Diluted EPS assumes all convertible securities (like convertible debentures, warrants, employee stock options) are converted into equity shares. This usually reduces EPS because the profit gets spread over more shares.

Formula:

Diluted EPS = (Net Profit – Preference Dividend) ÷ (Equity Shares + Convertible Shares)

Example:

  • Net Profit = ₹500 crore
  • Equity Shares = 50 crore
  • Convertible Debentures (if converted) = 10 crore shares

Basic EPS = ₹500 ÷ 50 = ₹10

Diluted EPS = ₹500 ÷ (50+10) = ₹8.33


3. Trailing EPS

EPS based on the last 12 months’ actual earnings (TTM – trailing twelve months).

Example: If Reliance Industries made profits of ₹1,50,000 crore in the last 4 quarters and has 675 crore shares outstanding:

EPS (TTM) = ₹1,50,000 ÷ 675 = ₹222.22


4. Forward EPS

This is based on projected future earnings. Analysts estimate future profits and divide by the number of shares.

Example: If HDFC Bank is expected to earn ₹50,000 crore in FY 2025 and has 555 crore shares:

Forward EPS = ₹50,000 ÷ 555 = ₹90.09


5. Reported EPS vs. Adjusted EPS

  • Reported EPS → As per company’s official financial statements.
  • Adjusted EPS → Adjusted for one-time items (like extraordinary loss, restructuring cost, or asset sale). Analysts prefer adjusted EPS to understand real performance.


EPS and Stock Price (Relation with P/E Ratio)

EPS is often combined with Price-to-Earnings (P/E) Ratio.

P/E = Market Price per Share ÷ EPS

Example: If TCS share price = ₹3,600 and EPS = ₹120,

P/E = ₹3,600 ÷ ₹120 = 30

This means investors are ready to pay 30 times the company’s earnings per share.


EPS in Indian Market: Case Studies

Infosys (FY 2024)

  • Net Profit: ₹25,000 crore
  • Shares: 415 crore
  • EPS: ₹60.24

Reliance Industries (FY 2024)

  • Net Profit: ₹89,000 crore
  • Shares: 675 crore
  • EPS: ₹131.85

Comparing Infosys and Reliance, Reliance has a higher EPS, but you also need to check the stock price and P/E ratio to see which is overvalued or undervalued.


Limitations of EPS

  1. EPS does not show debt levels. A company with high debt may have good EPS but high risk.
  2. EPS can be manipulated by share buybacks (reducing the number of shares increases EPS).
  3. It does not reflect cash flow directly.
  4. Comparing EPS across different industries may be misleading because profitability standards differ.