What is EPS (Earnings Per Share)?

EPS is an acronym for "Earnings Per Share," and it is calculated by dividing Net Income by the total number of shares outstanding.  This Net Income is commonly referred to as "Earnings."  Since Net Income or EPS does not reflect a company's true cash that it is generating from its business operations both are subject to "creative" accounting. Therefore, both EPS and Net Income can be manufactured to present a company in the best possible light.  For many companies EPS, or net income reflects a company's "booked," but not cash profits from business transactions.  Just because business transactions have been accounted for does not necessarily mean that the money owed will ever be collected.  Take a lemonade stand for example.  If the thirsty kids down the block promise to pay later, for lemonade that they drink today, this transaction according to current accounting standards, would be "booked" and reported as net income, or EPS (Earnings Per Share).  This EPS is then reported to the public even though the money has not been collected and may never be paid.  Today many of these "creative accounting" interpretations are used in simple ways such as this, or in varying degrees of complexity by companies to primarily promote stocks to an unwary public.

Fundamentally, any reported EPS or Net Income must be contrasted with StockDiagnostics.com's "OPS" (Operational-cashflow Per Share).  In the table below you can see how this contrast applied to Enron.

Enron's table shows the dramatic differences between StockDiagnostics.com's "OPS" (Operational-cashflow Per Share) and EPS (Earnings Per Share), a manufactured, financial interpretation.  Our "OPS" (Operational-cashflow Per Share) for Enron was negative for the first two quarters and positive for the third quarter of 2001.  Enron's EPS results were the exact opposite.  (See FAQ; Why does Enron have positive OPS^TM after it was diagnosed with The EPS Syndrome^TM?)