How to Calculate Earnings Per Share
Earnings per share (EPS) is calculated by determining a company’s net income and allocating that to each outstanding share of common stock. Net income is the income available to all shareholders after a company’s costs and expenses are accounted for.
Here’s how to calculate earnings per share:
EPS= AOCS NI where:NI= Net income AOCS= Average outstanding common shares
The formula uses the average outstanding shares. Typically, an average number is used because companies may issue or buy back stock throughout the year and that makes the actual outstanding shares and true earnings per share difficult to pin down. Using an average of outstanding shares can provide an accurate picture of the earnings for the company.
- Earnings per share is the portion of a company’s income available to shareholders and allocated to each outstanding share of common stock.
- EPS equals the difference between net income and preferred dividends, divided by the average number of outstanding common shares.
- EPS is sometimes known as the bottom line of a firm’s worth.
- The earnings per share figure can help investors gain an idea of a company’s financial performance.
- Earnings per share demonstrates earnings stability as well as the earnings trend, when compared over various quarter or years.
Earnings Per Share Explained
Example of How to Calculate EPS
Let’s look at an example of how to calculate earnings per share. As a reminder, the figure for earnings per share is calculated as follows:
EPS= AOCS NI − PD where:PD= Preferred dividends
Suppose that for the fiscal year 2021, net income for ABC Bank was $18.232 billion. Its preferred stock dividends were $1.614 billion. Its average outstanding common shares stood at 10.196 billion.
Here is the formula for EPS:
EPS=10.196 billion $18.232 billion −$1.614 billion EPS=10.196 billion $16.618 billion EPS=$1.63
Diluted EPS, which accounts for the impact of convertible preferred shares, options, warrants, and other dilutive securities, was $1.56.
Companies may choose to buy back their own shares in the open market to improve EPS. By doing so, a company doesn’t have to improve its net income. The better EPS results from the net income being divided up by a fewer number of shares.
Let’s say ABC Bank bought 1 billion shares back in 2021 through its share repurchase program. As a result, its EPS would have been:
EPS=9.196 billion $16.618 billion EPS=$1.81
The Significance of Earnings Per Share
EPS is a metric that can serve as a bellwether for a company’s current and future financial prospects. It’s the portion of a company’s net income that is allocated to each outstanding common share.
Use by Investors and Analysts
EPS is typically used by investors and analysts to gauge the financial strength of a company. In fact, it is sometimes known as the bottom line where a firm’s worth is concerned, both literally (as the last item on the income statement) and figuratively.
A higher EPS means a company is profitable enough to pay out more money to its shareholders. For example, a company might increase its dividend as earnings increase over time.
Investors typically compare the EPS of two or more companies within the same industry to get a sense of how one company is performing relative to its peers.
Investors may also look for trends in a company’s EPS growth over time to get a better idea of how profitable a company has been, how steadily earnings have grown, and the potential for future performance. A company with a steadily increasing EPS figure is considered to be a more reliable investment than one whose EPS is on the decline or varies substantially.
A Variable in the Price/Earning Ratio
EPS is also an important variable in determining a stock’s value. This measurement figures into the earnings portion of the price-earnings (P/E) valuation ratio. The P/E ratio is one of the most common ratios utilized by investors to determine whether a company’s stock price is valued properly relative to its earnings. It’s calculated by dividing EPS into the stock price.
Types of EPS
There are three basic types of EPS figures.
A company’s trailing EPS is based on the previous year’s data. In fact, a trailing EPS is calculated using the previous four quarters of earnings. It has the benefit of using actual numbers instead of projections.
Most P/E ratios are calculated using the trailing EPS because it represents what actually happened, and not what might be. On the other hand, while the figure is accurate, the trailing EPS is often considered old news. Many investors will also look at current and forward EPS figures.
This measurement typically includes figures from 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.
The forward EPS is calculated using projections for some period of time in the future (usually the coming four quarters).
Forward EPS estimates are made by analysts or by the company itself. While this number is based on estimates and not on actual data, investors are often very interested in the forward EPS because, in general, investing is predicated on estimates of a company’s future earning potential.
Investors often compare these three types of EPS calculations. For example, they may compare the forward EPS (that uses projections) with the company’s actual EPS for the current quarter. If the actual EPS falls short of forward EPS projections, the stock price may fall as investors register their disappointment. On the other hand, if the actual EPS beats its estimates, the stock may experience a rally.
What Is EPS?
EPS, or earnings per share, is a financial figure studied by investors, traders, and analysts. It is used to draw conclusions about a company’s earnings stability over time, its financial strength, and its potential performance.
What Is the Formula for Earnings per Share?
To calculate earnings per share, take a company’s net income and subtract from that preferred dividends. Then divide that amount by the average number of outstanding common shares.
Where Do I Find the Net Income Figure for the EPS Calculation?
You’ll find this figure at the bottom of a company’s income statement. Net income is the amount related to shareholder equity after costs and expenses have been deducted from a company’s income.
The Bottom Line
The earnings per share figure is especially meaningful when investors look at both historical and future EPS figures for the same company, or when they compare EPS for companies within the same industry.
Bank of America (BAC), for example, is in the financial services sector. Investors can compare the EPS of Bank of America with other financial institutions, such as JP Morgan Chase (JPM) or Wells Fargo (WFC), to get a relative idea of financial strength.
Since EPS is just one possible metric to use to examine companies’ financial prospects, it’s essential to use it in conjunction with other performance measures before making any investment decisions.