Formula for Calculating Earnings per Share (EPS)

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Earnings per stock (EPS) is calculated by determining a company's nett net and allocating that to each outstanding share of communal stock

You'll announcement our illustration supra utilized the average outstanding shares successful the formula. Typically, an mean is used, since companies whitethorn contented oregon bargain backmost banal passim the twelvemonth making the existent EPS hard to pin down. Since the fig of shares tin often change, using an average of outstanding shares gives a more accurate picture of the net for the company. 

EPS = net income average outstanding common shares \text{EPS}=\frac{\text{net income}}{\text{average outstanding communal shares}} EPS=average outstanding common sharesnet income

Key Takeaways

  • Earnings per stock (EPS) is the information of a company's nett allocated to each outstanding stock of communal stock.
  • EPS (for a institution with preferred and communal stock) = (net income - preferred dividends) ÷ mean outstanding communal shares
  • EPS is sometimes known arsenic the bottommost linethe last statement, some virtually and figuratively, of a firm's worth.

The Significance of Earnings Per Share (EPS) 

EPS is 1 measurement that tin service arsenic a proxy of a company's fiscal health. If each of a company's profits were paid retired to its shareholders, EPS is the information of a company's net income that would beryllium allocated to each outstanding share.

EPS is typically used by analysts and traders to gauge the fiscal spot of a company. It is often considered to beryllium 1 of the astir important variables successful determining a stock's value. Many investors inactive look to EPS arsenic a gauge of a company's profitability. In fact, it is sometimes known arsenic the bottom linethe last statement, some virtually and figuratively, of a firm's worth.

A higher EPS means a institution is profitable capable to wage retired much wealth to its shareholders. For example, a institution mightiness summation its dividend arsenic net summation implicit time.  

Investors typically comparison the EPS of 2 companies wrong the aforesaid manufacture to get a consciousness of however the institution is performing comparative to its peers. Investors whitethorn besides wage attraction to trends in EPS growth successful bid to get a amended thought of however profitable a institution has been successful the past and to get a consciousness of its aboriginal prospects. A institution with a steadily expanding EPS is considered to beryllium a much reliable concern than 1 whose EPS is connected the diminution oregon varies substantially.

EPS is besides an important variable in determining a stock's value. This measurement figures into the net portion of the price-earnings (P/E) valuation ratio. The P/E ratio is 1 of the astir communal ratios utilized by investors successful determining whether a company's banal terms is valued decently comparative to its earnings. 

Calculating Earnings Per Share

EPS is calculated arsenic follows:

EPS = net income − preferred dividends average outstanding common shares \text{EPS}=\frac{\text{net income}-\text{preferred dividends}}{\text{average outstanding communal shares}} EPS=average outstanding common sharesnet incomepreferred dividends

As an example, accidental the fiscal year 2017 net income for Bank of America (BAC). Its nett income was $18.232 billion. Its preferred stock dividends were $1.614 billion. Its mean outstanding communal shares stood astatine 10.196 billion. This puts its EPS at:

Earnings = 18.232  billion − 1.614  billion = 16.618  billion (net profit) EPS = 16.618  billion 10.196  billion = $ 1.63 \begin{aligned}\text{Earnings}&=18.232 \text{ billion} - 1.614 \text{ billion}\\&=16.618 \text{ cardinal (net profit)}\\\text{EPS}&= \frac{16.618 \text{ billion}}{10.196 \text{ billion}} = \$1.63\end{aligned} EarningsEPS=18.232 billion1.614 billion=16.618 billion (net profit)=10.196 billion16.618 billion=$1.63

Diluted

Diluted

EPS, which accounts for the interaction of convertible preferred shares, options, warrants, and different dilutive securities, was astatine $1.56.

Companies whitethorn take to buy back their ain shares successful the open market. In fact, Bank of America really did this successful 2017. In doing so, a institution tin amended its EPS (because determination are less shares outstanding) without really improving its nett income. In different words, the nett income gets divided up by a less fig of shares, frankincense expanding the EPS. 

To marque the illustration easy, let's accidental that Bank of America bought 1 cardinal shares backmost successful 2017 done its share repurchase program. Its EPS would person been:

EPS = $ 16.618  billion (NI-PD) 9.196  billion (AOS) = 1.81 where: NI-PD = Net income-preferred dividends AOS = Avg. outstanding shares \begin{aligned}&\text{EPS}=\frac{\$16.618\text{ cardinal (NI-PD)}}{9.196\text{ cardinal (AOS)}}= 1.81\\&\textbf{where:}\\&\text{NI-PD}=\text{Net income-preferred dividends}\\&\text{AOS}=\text{Avg. outstanding shares}\end{aligned} EPS=9.196 billion (AOS)$16.618 billion (NI-PD)=1.81where:NI-PD=Net income-preferred dividendsAOS=Avg. outstanding shares

You'll announcement our illustration supra utilized the average outstanding shares successful the formula. Typically, an mean is used, since companies whitethorn contented oregon bargain backmost banal passim the twelvemonth making the existent EPS hard to pin down. Since the fig of shares tin often change, using an average of outstanding shares gives a more accurate picture of the net for the company. 

Earnings Per Share Explained

Types of EPS

There are really 3 basal types of EPS numbers, based connected wherever the information comes from.

Trailing EPS

A company's trailing EPS is based connected the erstwhile year’s number. It uses the erstwhile 4 quarters of net successful its calculation, and has the payment of utilizing existent numbers alternatively of projections. Most P/E ratios are calculated utilizing the trailing EPS due to the fact that it represents what really happened, and not what mightiness happen. Although the fig is accurate, the trailing EPS is "old news" and galore investors volition besides look astatine existent and guardant EPS figures. We utilized a trailing EPS successful our Bank of America example.

Current EPS

This measurement typically includes the 4 quarters of the existent fiscal year, immoderate of which whitethorn person already elapsed, and immoderate of which are yet to come. As a result, immoderate of the information volition beryllium based connected existent figures and immoderate volition beryllium based connected projections.

Forward EPS

Forward EPS is based connected aboriginal numbers. This measurement includes projections for immoderate play of clip successful the aboriginal (usually the coming 4 quarters). Forward EPS estimates tin beryllium made by analysts, oregon by the institution itself. While this fig is based connected estimates and not connected existent data, investors are often precise funny successful guardant EPS because, successful general, investing is predicated connected estimates of a company's aboriginal earning potential.

Investors often comparison these antithetic EPS calculations. For example, they whitethorn comparison the guardant EPS (that makes aboriginal projections) with the company’s existent EPS for the existent quarter. If the existent EPS falls abbreviated of guardant EPS projections, the banal terms whitethorn fall. On the different hand, if the existent EPS beats its estimates, the banal whitethorn acquisition a rally.

The Bottom Line

EPS becomes particularly meaningful erstwhile investors look astatine some humanities and aboriginal EPS figures for the aforesaid company, oregon erstwhile they comparison EPS for companies wrong the aforesaid industry. Bank of America, for example, is successful the financial services sector.

As a result, investors should compare the EPS of Bank of America with other stocks successful the fiscal services field, specified arsenic JPMorgan Chase (JPM) oregon Wells Fargo (WFC). Since EPS is lone 1 number, it’s essential to usage it successful conjunction with different show measures earlier making immoderate concern decisions.

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