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Over 700 finance terms, Shmooped to perfection.
You can figure out a company's earnings per share (EPS) by taking the total earnings of the company, subtracting the dividends, and dividing that number by the number of shares outstanding.
Uh, why would you want to do that?
It can help tell you how profitable the company is, for one thing. It can also give you something to do on a rainy afternoon if you really like math.
Alison wants to invest in one of two companies. Her uncle's dry cleaning business makes $1 million in profits and her cousin's marketing company makes $2 million in profits. On the surface, it looks like the marketing company is the better deal, but Alison is a Shmoop reader so she knows better.
Her uncle's business pays out $50,000 in dividends to all shareholders and has 200,000 shares outstanding. That's an EPS of $4.75 ($1 million minus $50,000 divided by 200,000 shares). Her cousin's company has dividends of $200,000 and 100,000 shares outstanding—an EPS of $18.
Should she invest in the marketing company? Maybe. The EPS alone is not enough information. There's lots more she needs to know. Just how much debt does the company have? How happy are customers with the company? Is the company growing? Is there anything financially weird going on? But the EPS is one number she can use to figure out whether she might have a sound investment.