EPS, which stands for earnings per share, represents a company’s annualized net profit divided by the number of common shares of stock it has outstanding.
Because it’s a measure of profitability on a per-share basis, EPS is commonly used by investors to estimate the value of a company, per share.
Earnings Per Share Defined
Earnings per share, also known as EPS, is a very important number in business. It tells shareholders how much money each share of their stock earned for the company. It’s important because, usually, when a company has high earnings per share, it also has a high stock price, which makes investors happy.
The equation for calculating earnings per share is as follows:
Earnings per Share = (Net Income – Preferred Dividends) / Number of Common Shares Outstanding
Earnings Per Share Formula
There are several ways to calculate earnings per share.
Below are two versions of the earnings per share formula:
Earnings Per Share (EPS) = (Net Income – Preferred Dividends) / End of period Shares Outstanding
Earnings Per Share Formula (EPS) = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
Steps to calculate basic earnings per share
- Determine the company’s net income from the previous year.
- Determine the number of shares outstanding.
- Divide the net income by the number of shares outstanding.
Determine the company’s net income from the previous year
Using a company’s net income or earnings for the primary number is the most basic way to determine EPS. This information is normally found on their website or a financial webpage. Be careful not to mistake quarterly net income for annual.
Determine the number of shares outstanding
Shares outstanding is the number of shares a company has on the stock exchange. Financial websites should have this information available for public viewing.
Divide the net income by the number of shares outstanding
To determine the basic earnings per share you simply divide the total annual net income of the last year, by the total number of outstanding shares.
To calculate a company’s EPS, the balance sheet and income statement are used to find the period-end number of common shares, dividends paid on preferred stock (if any), and the net income or earnings. It is more accurate to use a weighted average number of common shares over the reporting term because the number of shares can change over time.
What is Net Income and Preferred Dividends
One of the factors used to figure earnings per share is the company’s net income. Net income is the profit left over after deducting the company’s expenses and is sometimes referred to as net profit or the bottom line.
Preferred dividends are the second item used to calculate earnings per share. Dividends are a share of the profit that is sometimes paid to shareholders.
Preferred dividends are dividends paid to the owners of a class of stock called ‘preferred’ stock. The preferred dividends can be found on the statement of retained earnings (also called the statement of stockholder’s equity) or from the income statement.
Types of Earnings Per Share
There are actually three basic types of EPS numbers, based on where the data comes from.
A company’s trailing EPS is based on the previous year’s number. It uses the previous four quarters of earnings in its calculation and has the benefit of using actual numbers instead of projections. Although the figure is accurate, the trailing EPS is “old news” and many investors will also look at current and forward EPS figures. We used a trailing EPS in our Bank of America example.
This measurement typically includes the four quarters of the current fiscal year, some of which may have already elapsed, and some of which are yet to come. As a result, some of the data will be based on actual figures and some will be based on projections.
Forward EPS is based on future numbers. This measurement includes projections for some period of time in the future (usually the coming four quarters). Forward EPS estimates can be made by analysts, or by the company itself.
Frequently Asked Questions
What is a good EPS?
Whether EPS is good or bad depends upon multiple factors, such as the recent performance of the company or the performance of the company’s competitors or industry.
Investors usually assess whether an EPS is good or bad relative to the consensus of EPS expectations from analysts that cover the stock. For example, a growing EPS can be good but if it misses the analysts’ estimate, the stock price could fall.
What is adjusted earnings per share?
A simple definition of adjusted earnings per share is an EPS calculation where certain extraordinary or non-recurring components of income are either added or removed. For instance, the fair value cost of issuing stock options to employees is often added back in calculating adjusted earnings per share.
What does it mean if EPS is negative?
Earnings per share can be negative when a company’s income is negative, which means that the company is losing money, or spending more than it is earning. A negative EPS does not necessarily mean that a stock is a sell.