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Understanding financial metrics is crucial for making informed investment decisions. Among these, Earnings Per Share (EPS) stands out as a key indicator of a company’s profitability and market valuation.
In this article, we will define EPS, explain how to calculate it, explore various types of EPS, and provide essential tips for interpretation and practical application.
Key Takeaways:
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Earnings per share (EPS) measures a company’s profit on a per-share basis, calculated by dividing net income by the number of outstanding shares of common stock.
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The EPS formula is: Earnings Per Share (EPS) = (Net Income – Preferred Dividends) / End of Period Common Shares Outstanding.
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Different types of EPS include Forward EPS, Book Value of Equity Per Share (BVPS), and Cash EPS.
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EPS should not be analyzed in isolation; it’s essential to consider other financial metrics like capital expenditures, dividends, and total shares outstanding.
What Does Earnings Per Share (EPS) Mean?
Earnings Per Share (EPS) represents a company’s profit divided by the number of outstanding shares of common stock. This metric is critical for assessing a company’s profitability and determining if its share price reflects its earnings potential.
Publicly traded companies disclose their EPS each quarter to their shareholders, often adjusting figures for potential share dilution and extraordinary items.
How to Calculate a Company’s Earnings Per Share
To calculate EPS, take the net income (or profit) of the company, subtract any preferred dividends, and divide this number by the total number of outstanding common shares.
Preferred dividends are payments made to preferred shareholders before common shareholders can receive dividends.
The formula for calculating EPS is as follows:
Earnings Per Share (EPS) = (Net Income – Preferred Dividends) / End of Period Common Shares Outstanding.
This information can be found in a public company’s quarterly balance sheet. As the number of outstanding shares may fluctuate throughout the quarter, it’s advisable to use a weighted average for more accurate calculations.
Earnings Per Share Example Calculations
Here are some examples to illustrate how to calculate basic earnings per share:
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Company A
Net income: $18.78 billion
Preferred dividends: $1.23 billion
Weighted common shares: 10.4 billionBasic EPS:
$18.78 billion – $1.23 billion / 10.4 billion = $1.688 -
Company B
Net income: $452 million
Preferred dividends: $0
Weighted common shares: 4.7 millionBasic EPS:
$452 million – $0 / 4.7 million = $96.17 -
Company C
Net income: $23 million
Preferred dividends: $1.7 million
Weighted common shares: 1.6 millionBasic EPS:
$23 million – $1.7 million / 1.6 million = $13.31
Different Types of Earnings Per Share
While we have covered basic EPS, it’s important to note that there are several variations that account for different factors:
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Forward EPS: This is a projection of a company’s EPS based on expected earnings in future quarters. Analysts often rely on growth patterns and economic conditions for these forecasts, making Forward EPS a vital metric for investors focused on future performance.
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Trailing EPS: Calculated using the basic EPS formula, this metric uses earnings from the previous four quarters. Trailing EPS reflects past performance, which some investors prefer over estimates, particularly for established companies.
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Pro Forma/Ongoing EPS: This calculation excludes extraordinary items, focusing solely on earnings from core operations. It provides a clearer picture of sustainable earnings and is useful for comparing companies.
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Book Value of Equity Per Share (BVPS): BVPS calculates the equity of each share based on the company’s total assets. It represents a “price floor” for shares, reflecting the theoretical value if the company were to liquidate its assets.
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Retained EPS: This figure includes net income plus retained earnings, minus dividends paid out. It indicates how much profit is being reinvested in the company.
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Cash EPS: Calculated by dividing operating cash flow by diluted shares outstanding, Cash EPS focuses on cash generated from core operations, providing insights into the company’s liquidity and operational efficiency.
How to Interpret Earnings Per Share
While EPS is a valuable metric, it should not be the sole determinant of a company’s value. Consider these factors alongside EPS:
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Capital and Expenditures: The efficiency with which a company generates earnings can vary significantly. Two companies may report identical EPS, but one may do so with fewer resources, indicating greater operational efficiency.
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Price-to-Earnings (P/E) Ratio: Comparing a company’s P/E ratio against industry averages can help determine fair valuation based on EPS.
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Dividends: High EPS does not guarantee shareholder returns; many companies reinvest profits rather than pay dividends. This can affect how investors perceive value in companies that prioritize growth over shareholder payouts.
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Earnings Beat/Miss: Stock prices often react based on expectations of future earnings rather than current EPS figures. Positive surprises can boost stock prices, while misses can lead to declines.
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Misleading Figures: Management can manipulate EPS through share buybacks or accounting practices, which makes it essential to analyze EPS in context with other metrics.
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Shares Outstanding: EPS calculations can vary between basic and diluted figures. Diluted EPS provides a more conservative view by accounting for potential shares from options or convertible securities.
Issues With Earnings Per Share
While EPS is a critical metric in finance, it does not provide a complete picture of a company’s financial health. Factors such as unique revenue streams, stock buybacks, and accounting practices can distort the true meaning of EPS. Thus, EPS should be used in conjunction with other metrics for a well-rounded financial analysis.
Author
Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.
