EPS is the portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
EPS is Calculated as:
EPS=
Net Income available for common stock holders
Outstanding Number of Shares
In the EPS calculation, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.
Diluted Earnings Per Share expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.
EPS is considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $250 million. If the company pays out $10 million in preferred dividends and has 100 million shares for half of the year and 150 million shares for the other half, the Earnings Per Share would be $1.92 (240/125). First, the $10 million is deducted from the net income to get $240 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 100M+ 0.5 x 150M = 125M).
EPS is considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $250 million. If the company pays out $10 million in preferred dividends and has 100 million shares for half of the year and 150 million shares for the other half, the Earnings Per Share would be $1.92 (240/125). First, the $10 million is deducted from the net income to get $240 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 100M+ 0.5 x 150M = 125M).
An important aspect of Earnings Per Share (EPS) that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) : that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number.
EPS : Where to use this financial ratio?
Companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?
It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
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EPS = Net Earnings / Outstanding Shares
EPS = Net Earnings / Outstanding Shares
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Using our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an Earnings Per Share (EPS) of 2 ($100 / 50 = 2).
So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS (Earnings Per Share).
So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS (Earnings Per Share).
The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some other ratios, which will we discuss in other articles.