EPS — What It Measures and How It Lies

The definition

Earnings Per Share = net income ÷ shares outstanding. It answers: "if the company's whole yearly profit were split among shareholders, how much per share?" A $2 EPS on a $40 stock means the business earns 5% of its price in profit per year (the earnings yield — the inverse of P/E).

Three honest questions

EPS is only meaningful after asking: (1) WHICH earnings — GAAP reported, or "adjusted" (excluding "one-time" items that recur every year)? (2) HOW MANY shares — did buybacks shrink the count (real EPS growth) or did issuance dilute you? (3) WHAT QUALITY — is net income backed by cash, or by accruals and estimates? Two companies with identical EPS can be entirely different investments.

Where it lies

EPS lies through: one-off gains booked as operating profit, restructuring charges that repeat annually, pension assumptions, revenue recognized early, and share-count games. The fix is reading the cash flow statement (day 18) and the fine print of "adjusted" numbers — the gap between GAAP and adjusted EPS is itself a signal.

Sources

• Earnings Per Share (EPS)Investopedia
• Financial Statement Analysis and Security ValuationStephen Penman