Investing without research? That’s like buying a car without lifting the bonnet. You just don’t know what you’re getting into.

While investing can be simple, it still helps to understand what you’re investing in — and why it works (or doesn't work) for your goals.

One tool investors use to assess companies when investing in individual shares is earnings per share (EPS). EPS isn’t an all-encompassing measure. But it can give you a useful snapshot of a company’s financial performance.

In this article, we’ll break EPS down for you. That includes what it means, how it’s measured, and how it might help you make informed decisions as you invest.

What is earnings per share?

Earnings per share (EPS) shows how much profit a company makes for each share a person holds. It’s one of the most common measures for investors buying specific companies .

EPS is calculated by dividing a company’s net profit by the number of shares on issue. That gives you a per-share figure. Let’s say a company earns $1 million in profit and has 1 million shares. The EPS would be $1. This is the simplest calculation of EPS – we’ll explore it in more detail next.

Because EPS is shown on a per-share basis, it can help to standardise company earnings. That means it can be used to compare businesses of different sizes without skewed results.

EPS doesn’t tell you everything, but it offers a clear starting point for understanding how much profit a company is making per share.

How do I measure EPS?

The basic formula for earnings per share looks like this:

EPS = (Net profit – preferred dividends) ÷ average number of shares on issue

It reveals how much profit the company earns for each ordinary share. Preferred dividends are subtracted because they’re paid to preferred shareholders before anything goes to ordinary shareholders.

While most platforms calculate EPS for you, it helps to understand what’s behind the number. That way, you can spot when something doesn’t quite add up.

You’ll usually find EPS in a company’s annual report, on the Australian Securities Exchange (ASX) website, or listed on major financial news and investing sites. You might also come across two versions: basic and diluted EPS. Basic EPS uses the current number of shares. Diluted EPS includes potential future shares, like employee stock options and convertible securities, as a more conservative approach.

For many long-term investors , the difference won’t be huge, but it’s worth knowing both exist.

Why some investors use EPS

When you're trying to make sense of company performance, it can feel like there’s too much to look at. Too many numbers. Too many ratios. EPS can help to cut through the noise, at least a little.

Let’s look at why some investors use it.

It allows comparisons between similar companies

EPS can help level the playing field when comparing companies in the same sector. Because it shows profit on a per-share basis, it can remove some of the size bias.

Here’s an example. You might consider investing in two retail businesses. One earns $2 billion and the other earns $500 million. The larger company might seem more successful, until you check their EPS:

• Company A earns $2 billion in net profit and has 2 billion ordinary shares on issue.

  EPS = $2B ÷ 2B = $1 per share

• Company B earns $500 million in net profit but only has 100 million ordinary shares on issue.

  EPS = $500M ÷ 100M = $5 per share

Even though Company A is bigger, Company B has a higher EPS. That might suggest it’s earning more profit per share.

It’s a key part of other investing tools

EPS is also used in valuation ratios, like the price-to-earnings (P/E) ratio . This helps show how much investors are willing to pay for each dollar of earnings.

A lower P/E could suggest a company is undervalued. A higher P/E might suggest strong growth expectations or an overpriced stock. Either way, EPS is a core part of the equation.

It can show signs of growth over time

Some investors track a company’s EPS over multiple years. If it’s growing steadily, that could signal improving profits. A rising EPS might look like a good sign, especially for long-term investors.

But EPS is based on past performance. It shows what a company has already earned, not what it will earn in the future. Past results don’t guarantee future outcomes, so it's worth noting this limitation.

EPS can be a useful starting point. Even so, it works best when paired with other information like revenue, debt levels, or profit margins. If you’ve ever looked at EPS and felt unsure, you’re not the only one. It’s a tool, not a verdict.

What EPS doesn’t tell you

Earnings per share can be useful. But like any metric, it has its blind spots:

• EPS doesn’t show how a company manages its money . It doesn’t reflect cash flow, debt levels, or how profits are used. A business might have strong earnings but still struggle to pay bills if cash flow is weak.
• EPS can rise even if profits stay flat . This can happen when a company buys back its shares. With fewer shares on issue, the same profit is split across a smaller number, so EPS looks higher.
• One-off events can inflate EPS . If a company sells an asset or makes a large gain from something outside normal operations, profits might jump for a year. But that boost won’t always repeat.

That’s why many investors are cautious about relying on EPS alone. It’s a helpful number, but it doesn’t tell you all you need to know about a company’s financial health. Looking beyond EPS can help you spot what’s really driving a company’s performance.

Should I use EPS alongside other tools?

Now, you might be thinking: “ But how can I make sure I use EPS sensibly?” .

We’ve got you.

The EPS figure doesn’t reveal whether a share is overvalued, undervalued, or somewhere in between. That’s why many investors also look at other measures, like the P/E ratio (we’ve covered that), return on equity (ROE), and dividend yield.

Return on equity

Return on equity shows how effectively a company turns shareholder money into profit.

Example:
If a company has $1 million in profit and $5 million in shareholder equity, its ROE is 20%. That means it earned 20 cents for every dollar invested by shareholders.

ROE can help you understand how efficiently a business uses its resources. But even then, it has limits. A high ROE might look good until you realise it’s driven by high debt rather than smart business decisions.

Dividend yield

Dividend yield compares a company’s dividend payments to its current share price .

Example:
If a share costs $20 and pays a $1 annual dividend, the dividend yield is 5%. That gives you an idea of potential income, but it doesn’t say whether the dividend is sustainable or likely to grow.

No single number tells the full story. EPS, P/E, ROE and dividend yield each offer a different lens. You might focus on growth, income, efficiency or a mix of all three.

If you feel like you need to know everything before making a move, you don’t. But understanding how EPS fits within a wider view can help to make you more informed — and that’s what matters.

EPS is one tool, not the whole toolkit

Earnings per share can help you understand a company’s profits on a per-share basis. But it’s not a measure to fully rely on. Depending on your investment style and priorities, it might help to draw on other measures like the P/E ratio, ROE and dividend yield.

You don’t need to be an expert to explore company fundamentals. Just start where you are and build from there. Even understanding a few simple numbers can give you more clarity. That clarity can help you feel more confident in your decisions.

Investing is a long game. You can take it step by step, at your own pace. And you’re already doing the important part — asking questions, doing research, and learning as you go. That’s how good investing habits begin.