What is a good earnings per share (EPS) ratio?

Before you invest in a company, there are many metrics you can look at to determine the profitability and financial health of a firm beforehand. 

One metric worth considering is the earnings per share (EPS) ratio. 

We explore what you need to know about the EPS ratio, including what experts consider a good EPS. 

Summary  

• Earnings per share tells you the value of each outstanding share in a company. 

• However, whether an EPS is considered good depends on many factors, including the company's size and sector.  

• While the EPS ratio is useful, it shouldn’t be used in isolation to determine a company’s health, as other financial metrics can offer helpful insights. 

• A financial adviser can help you with your investment strategy, including how to create a diversified portfolio.  

What is the earnings per share? 

EPS can be a useful financial ratio as it can be used to find out the value of each outstanding share in a specific company.  

Without using the EPS ratio, it can be hard to figure this out as the number of shares individual companies have and their profitability can vary significantly.  

So, the EPS ratio offers a way to measure a company’s profitability on a per-share basis, providing an insight into the overall business performance.  

It can also be useful for analysts as they can compare the EPS with other companies in the same sector, while investors can look at how specific firms stack up against their rivals. 

How do you work out the earnings per share ratio? 

To find out a company’s EPS ratio, you need to subtract any dividend payments from the net income.  

Then, you need to divide that figure by the number of outstanding shares. 

For example: 

Company A has a net income of £750,000 (after dividends have been subtracted from net income) and 75,000 outstanding shares, giving it an EPS of £10.   

What is a good EPS, and how should it be used? 

It’s difficult to pinpoint what a good EPS is, although a higher figure is usually seen as positive. 

Whether an EPS is impressive depends on many factors, such as: 

• The company and its size 

• The industry the company operates in 

• The company’s anticipated future performance  

So, it’s generally beneficial to use EPS as a comparative measure for similar companies to see if it’s outperforming their peers rather than across different sectors.  

If the EPS is rising over many years, this suggests the company is financially healthy as it implies it’s becoming increasingly profitable on a per-share basis.  

If the contrary is true, which you can find using historic EPS, this suggests the company is becoming less profitable on a per-share basis. 

While the EPS ratio can help investors and analysts figure out what shares in the company should be worth, other metrics, such as the price-to-earnings (P/E) ratio and profit margin, should be used for a fuller financial picture.  

Using other financial metrics also means that investors and analysts alike aren’t led only by the EPS, which can be impacted by share buybacks.  

What are the pros and cons of using EPS to evaluate a company? 

There are many advantages and disadvantages to the EPS ratio. 

The pros of the EPS ratio: 

• It’s a quick way to understand a company’s profitability on a per-share basis and can be used to compare against competitors. 

• Looking at historic EPS can reveal whether a company’s profitability is improving and may imply more profitability in the future.  

The cons of the EPS ratio: 

• While EPS offers a snapshot into a company’s profitability on a per-share basis, it doesn’t consider cash flow, debt, or capital expenditure, which can affect overall financial health.  

• EPS can be impacted by share buybacks, mergers and acquisitions (M&A) and accounting practices. 

• This financial metric doesn’t take into account the company’s share price, and a high EPS doesn’t mean the company will increase in value in the future. 

What else should I consider? 

The EPS ratio of a company only reveals part of its overall financial health. 

To get a fuller picture, you should also review financial metrics, including:  

• P/E ratio: This reveals how much investors will pay for every pound of profit a company makes. The higher the number, the more valuable the company is perceived. You can calculate the P/E ratio by dividing the share price by the firm’s EPS.  

• Dividend yield: This shows how much a company pays out in dividends in relation to its share price. A higher yield is typically seen as positive, but it could also be seen as risky. You can calculate dividend yield by dividing the total dividend per share by the company’s share price. 

• Profit margin: Looking at the profit margin can help you determine how well a company is managing its costs and generating a profit. It’s the percentage of revenue after all business expenses have been paid. To work out a company's profit margin, divide the profit by revenue and then multiply by 100.  

This isn’t a definitive list, as there’s revenue growth, free cash flow and return on equity, and a range of financial ratios such as the price-to-book ratio.  

It’s also a good idea to compare the financial metrics of your chosen companies with those of others in similar industries. 

Need help with your investing strategy? 

Deciding where to invest can be overwhelming, especially when there is so much information available and ways to measure a company's financial health. 

However, investing doesn’t have to be a stressful and frustrating experience – and you’re not alone.  

Unbiased can quickly match you with a financial adviser who can look at your unique circumstances and future goals to help you find the right investment strategy. 

They can help you build the right portfolio for your needs, ensure you reach your financial goals, and regularly review your investments.