Level 6 · Financial Analysis
EPS
Profit per slice, and the number of slices can change.
In this lesson
What you'll be able to do
- Calculate EPS
- Distinguish basic from diluted EPS
- Explain how buybacks and new issues move EPS
- Use EPS growth carefully
Think about it
A company's total profit stayed exactly the same, yet EPS rose 10%. How?
Story
Let's picture it
A pizza is cut into 8 slices for 8 friends. Next week the same pizza is cut into 10 slices because two more friends arrived. The pizza did not shrink, but each person's slice did. Issuing new shares does exactly this to earnings per share; buying back shares does the reverse.
Visual
EPS in three steps
Net profit
Profit attributable to equity shareholders
÷ Number of shares
Use the weighted average outstanding shares
= EPS
Profit earned per share
Check dilution
Options and convertibles create future shares
Plain English
The simple explanation
EPS is net profit divided by the number of shares. It converts a huge, hard-to-compare profit number into a per-share figure you can track over time.
Basic EPS uses existing shares. Diluted EPS also counts shares that could be created from employee stock options and convertible instruments. Diluted is the more conservative number.
Because the denominator can change, EPS growth is not the same as profit growth. Always check whether share count rose or fell before celebrating an EPS jump.
Real world
Indian IT buybacks
When large Indian IT companies buy back shares, the outstanding share count falls. Even with flat profit, EPS rises because the same earnings are divided among fewer shares, a mechanical effect worth understanding before reading it as growth.
Watch out
Common mistakes
- Assuming EPS growth always means business growth.
- Using basic EPS when dilution is significant.
- Comparing EPS across companies as if it were a valuation measure.
Did you know?
EPS is one of the few figures Indian companies must disclose on the face of the profit and loss statement itself, both basic and diluted.
Your turn
Mini challenge
Find a company's basic and diluted EPS. Calculate the percentage difference, that gap is the dilution effect.
Quick quiz
1 / 5
Wrap up
Summary
EPS converts profit into a per-share figure, but the share count is not fixed. Check dilution and buybacks before reading EPS growth as business growth.
- EPS = net profit ÷ shares
- Diluted EPS is the conservative number
- Buybacks lift EPS mechanically
- EPS growth ≠ profit growth
Revise