What is Earnings Per Share (EPS) of a Stock? (Value Investing for Beginners)

Quick Overview

Earnings Per Share (EPS) is a fundamental investment metric calculated by dividing a company's Net Income by the total number of outstanding shares, revealing how much profit is attributed to each share of ownership, which is crucial for comparing profitability between companies of different sizes within the same industry, as demonstrated by comparing Coca-Cola's $2.47 Basic EPS to PepsiCo's $6.97 Basic EPS, despite Coca-Cola having higher overall profit.

Key Points: EPS is calculated as Net Income divided by the total number of Shares Outstanding. Coca-Cola's 2024 Basic EPS is $2.47 ($10.6B profit / 4.309B shares), while PepsiCo's Basic EPS is $6.97 ($9.5B profit / 1.373B shares). Diluted EPS accounts for potential shares from options or convertible securities, resulting in a slightly lower EPS ($2.46 for Coca-Cola and $6.95 for PepsiCo in the example). EPS should only be used to compare companies within the same industry (e.g., Coca-Cola vs. PepsiCo, not Coca-Cola vs. Tesla). Company profits are allocated through reinvestment, investing in other assets, keeping as reserve, share buybacks, or distributing as dividends to shareholders. The P/E Ratio (Stock Price / EPS) is a helpful valuation metric that must be used alongside EPS for a complete analysis.

Context: This video explains the Earnings Per Share (EPS) metric for beginner value investors, using an analogy of slicing a pizza to illustrate the concept of dividing total profit among ownership units. It then compares the 2024 EPS figures for two major beverage companies, Coca-Cola and PepsiCo, to show how EPS reveals relative profitability per share, contrasting it with total profit.

Detailed Analysis

The video thoroughly explains Earnings Per Share (EPS) as a key investment metric that measures how much profit a company generates for each unit of ownership (share). It defines the formula: EPS = Net Income / Shares Outstanding. The narrator illustrates this using a pizza analogy where profit is sliced into equal portions per share. The video then applies this concept to real companies, comparing Coca-Cola and PepsiCo using 2024 data. Coca-Cola earned $10.6 Billion profit with 4.309 Billion shares, yielding a Basic EPS of $2.47 (and Diluted EPS of $2.46). PepsiCo earned $9.5 Billion profit with 1.373 Billion shares, resulting in a significantly higher Basic EPS of $6.97 (Diluted EPS of $6.95). The video emphasizes that EPS should only be used for comparison within the same industry (e.g., beverage companies), not across different sectors (like beverages vs. autos). Furthermore, the video outlines the five primary uses for company profits: reinvestment in the business, investment in other assets, keeping as reserve, buying back shares, or distributing as dividends. Finally, it introduces the Price-to-Earnings (P/E) Ratio as a necessary complementary valuation metric, urging viewers to watch a dedicated video on dividends for further learning.