Definition
Earnings per share (EPS) is the portion of a company's net income for a period (usually one year) that belongs to common stock, divided by the number of common shares outstanding (the period's average, excluding the shares the company holds as treasury stock). It shows how much pure profit one share generated, and it is the most widely used measure for comparing the real, solid profitability of companies.
What Matters Is the Size of Your Slice, Not the Pizza
Think about ordering pizza with friends. Even if the shop sends one giant pizza, if 100 people show up, your share is barely a bite. On the other hand, even a small pizza fills you up if only two of you share it.
Companies work the same way. Say a company earned 10 billion won in a year. If it has issued 100 million shares, one share earned only 100 won. Meanwhile, a small company that earned just 1 billion won but has only 100,000 shares has earned 10,000 won per share.
Earnings per share was created so you don't get fooled by the total profit you see on the surface, and can instead weigh the real value of the one share you own.
When EPS Rises, Each Share's Slice Grows
Earnings per share is the most honest report card of a company's basic health. The more net profit a company makes by doing business well, the more naturally the portion going to each share grows with it.
When each share earns more, the company has more room to pay dividends back to shareholders. It also has a sturdier stockpile of money for research and development or equipment investment to grow the business next year. That is why many investors treat whether EPS keeps rising steadily as an important standard for judging a company. Keep in mind, though, that even when EPS rises, the stock price can move differently depending on market expectations and many other factors.
EPS is also a compass for judging whether the current stock price is expensive or cheap. It is the reference point when you calculate the price-to-earnings ratio (PER), which is the stock price divided by EPS.
To Be a Little More Precise
To be a little more precise, EPS can swing even when net income stays the same, if the number of shares changes. For example, if a company needs money and keeps printing new shares (a rights offering), the profit pie stays the same but the number of slices grows, so each slice gets smaller. This is called "dilution," because the value of each share gets watered down.
On the other hand, if a company uses its earnings to buy back its own shares and cancel them (treasury stock retirement), the number of pizza slices shrinks, and EPS for each remaining share jumps. Shareholders' portions grow like magic, even though total net income hasn't increased.
So to analyze a company properly, you need the habit of checking carefully not only whether net income itself really grew, but also how the number of issued shares changed.
Common misconceptions
If a company's total net income is higher than last year, its EPS must be higher too.
Even if net income grew, if the company issued far more new shares, the profit per share can actually shrink.
A stock with a high EPS is always cheap.
EPS only shows how much one share earned. You have to compare it with the stock price currently traded in the market to tell whether the stock is cheap or expensive.
Where you meet it
If a company with 1 billion won in net income has 1 million shares in total, its EPS is 1,000 won.
If a company buys back its own shares and cancels them (retirement), the profit per share goes up even though total net income is the same.
In one sentence
EPS is a company's total net income divided by its number of shares: the solid profit that one share produced.