Financial Term Explorer
Earnings Per Share (EPS)
How much profit a company makes for each share of stock. The foundation for calculating payout ratio and assessing whether dividends are sustainable.
đź“ť Definition
**Earnings Per Share (EPS)** is a company's net income divided by its outstanding shares. The formula is `EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding`. It's a key profitability metric used to evaluate stocks and calculate payout ratios.
In Simple Terms
If a company earns $1 billion and has 500 million shares outstanding, EPS is $2. If they pay $1 per share in dividends, the payout ratio is 50%—very sustainable. But if EPS drops to $0.80 while dividends stay at $1, that's a 125% payout ratio—danger zone!
Example
Johnson & Johnson's EPS was about $10 in 2023, and they paid about $4.70 in dividends per share—a healthy 47% payout ratio. This leaves plenty of room for dividend increases even if earnings dip temporarily.
đź’ˇ Practical Tips
- 1Track EPS growth over time—sustainable dividend growth requires earnings growth.
- 2Compare forward EPS estimates with current dividend to assess future safety.
- 3Look for consistent EPS growth rather than one-time spikes.
⚠️ Common Mistakes
Ignoring adjustments for one-time items that inflate or deflate EPS temporarily.
âť“ Frequently Asked Questions
Why do some stocks have negative EPS but pay dividends?â–Ľ
They may use reserves, debt, or asset sales. This is unsustainable long-term and is a warning sign.
Which EPS should I use—GAAP or adjusted?▼
GAAP is more conservative; adjusted removes one-time items. Consider both and understand the differences.