EPS – What is Earnings Per Share?

Earnings per share (EPS) is a way to gauge how profitable a company is by showing how much profit each share of common stock has generated. You get it by taking the company’s net income and dividing it by the total number of shares that are currently outstanding. Basically, the higher the EPS, the more profitable the company is seen to be.

Calculation of EPS

Earnings per share (EPS) is figured out by taking the net income, which is basically the profits, and dividing it by the number of shares available. To get a more accurate number, you can tweak this calculation by factoring in shares that might come from options, convertible debt, or warrants. Plus, it’s better to adjust the net income for ongoing operations to make the figure more meaningful.

\(\text{Earnings per Share} = \frac{\text{Net Income − Preferred Dividend}}{\text{End-of-Period Common Shares Outstanding }}\)

To figure out a company’s EPS, you need to look at the balance sheet and income statement to get the total number of common shares at the end of the period, any dividends paid on preferred stock, and the net income. It’s best to use a weighted average of common shares throughout the reporting period since the number of shares can fluctuate. Knowing how to calculate EPS is key to assessing a company’s profitability.

If there are any stock dividends or splits, those should be included in the weighted average share count. Some sources make it easier by just using the number of shares outstanding at the end of the period.

Conclusion

Earnings per share (EPS) is a key metric that helps connect a company’s stock price to its real earnings. Typically, a higher EPS is seen as a good sign, but it’s important to keep in mind the number of shares available, the risk of share dilution, and how earnings are trending over time. If a company falls short or exceeds what analysts expect for EPS, its stock can either take a nosedive or shoot up, depending on the situation.