Organizations evaluate their financial health using a variety of values. Earnings per share (EPS) is a measure of how well a company is doing financially and how much its stock is worth. But the question is, “How do you calculate earnings per share?” What formula comes in handy when you need to calculate earnings per share? What is the stock/earnings per share ratio? Let’s find out…
Earnings per share (EPS) is an accounting metric that is found by dividing the net income available to common shareholders by the average number of shares outstanding during a certain time period. The EPS calculation shows how well a business can make net profits for its common shareholders.
But that’s just on the surface. In a more detailed outline this article will explain how to calculate earnings per share, what formula to use, how stock per share comes into the mix and what the earning per share ratio really means.
But as always we will begin with the basics…
Earnings per share (EPS) measures the share of net income that shareholders would get if all of the company’s shares were distributed to shareholders. EPS gives a lot of information about a company, especially about how profitable it is now and how profitable it expects to be in the future. To figure out EPS, you can use basic financial information you can find online and information from a company or other organization.
It’s a bit arbitrary to use one EPS figure for one business. Compared to other businesses in the same industry and the share price of the business (the P/E ratio), the figure becomes more significant.
When comparing two companies in the same industry with the same number of outstanding shares, a higher EPS means the company is making more money. EPS and a company’s share price are often used together to figure out how “cheap” (low P/E ratio) or “expensive” (high P/E ratio) it is compared to other similar companies.
What is earnings per share and why is it important?
EPS, a popular statistic for determining corporate value, shows how much cash a firm produces for every share of its stock. Because investors would pay more for a firm’s shares if they believe the company has more significant earnings than its share price, so a higher EPS denotes more value.
There are two ways to calculate EPS. These two ways are shown below. However, each comes with an earnings per share formula to help you navigate through easily.
EPS = (Net venue – Preferred Dividends) / End of period Shares Outstanding
EPS = (Net venue – Preferred Dividends) / Weighted Average Shares Outstanding
Most times, analysts prefer using the weighted average outstanding shares when computing the denominator.
Basically, EPS that has been diluted to account for outstanding warrants, convertible instruments, and options that, if executed, could change the number of shares outstanding.
But a unique type of Earnings Per share formula is the adjusted EPS.
This EPS formula removes all revenues and losses from non-core operations, including the ones from minority holdings. Meanwhile, this calculation aims to get rid of the loss and normalize the loss from core operations.
Example of EPS formula
Company XYZ had a net venue worth $1 million in the third quarter. The business declares dividends of $250,000. There are 11,000,000 shares outstanding in total.
XYZ Ltd.’s EPS would be:
EPS = ($1,000,000 – $250,000) / 11,000,000
EPS = $0.068
Assuming that each share gets an equal part of the net income, this equates to a payout of $0.068 per share.
Remember that many businesses do not issue preferred shares, so there are no favored dividends to account for. Preferred dividends are subtracted since they must be paid out before ordinary shareholders receive anything, and EPS only represents earnings that are accessible to common shareholders.
As we earlier mentioned, EPS can be calculated in two ways: using either a standard earnings-per-share equation or a weighted earnings-per-share equation. The steps to determine earnings per share by using a fundamental equation are as follows:
1. Find out the business’s net income for the preceding year.
The easiest method for calculating EPS is to use a company’s net earnings or revenues as the key metric. Usually, a company’s website or a finance webpage will have this information. Ensure you don’t confuse the company’s quarterly net income with its yearly net income.
2. Count the number of outstanding shares that are outstanding.
The quantity of shares a company owns on the stock exchange is known as shares outstanding. These details are available on open web pages that host financial data. If you do business with a company directly, you can also look for this documentation on its website or existing databases.
3. Divide the net revenue by the outstanding shares.
The basic earnings per share can be calculated by dividing the total net income for the last year by the whole number of outstanding shares. Free shares are those that a corporation has previously distributed to investors. They consist of pieces of restricted stock as well as common stock.
An illustration would be a corporation with a net income of $5 billion in 2019 and 1 billion outstanding shares.
(5 billion divided by 1 billion) is the basic earnings per share.
Basic EPS = 5
Since it considers dividends, commonly referred to as preferred stocks, that a company pays to its shareholders, weighted earnings per share are the more accurate way to calculate EPS. A company’s payout of profits to shareholders is known as a dividend, which typically occurs every quarter. How to figure it out is as follows:
1. Find out the preferred stock dividends paid by the company.
This information is accessible on a company’s site or an accounting webpage, just like other types of information. You can access the data as part of the job if you work for the corporation as an employee or contractor. If you’re a shareholder, you can access the data by speaking with the company’s leaders.
2. Calculate the company’s annual net income after deducting dividends.
Investors receive dividend payments from businesses all year round. As a liability instead of an asset, the dividends are not included in the company’s yearly net income. The dividends are deducted from the income to account for this.
3. By the typical number of shares outstanding, divide the difference.
When we talk of outstanding shares, just like the words imply, it refers to shares that are still in investors’ custody. Share blocks and restricted stocks are two examples of what they might contain. The number of shares is deducted from the yearly net income before dividends, just like in the basic calculation of earnings per share.
For instance, a firm’s net revenue for 2019 was $15 billion. It has 4 billion outstanding shares and distributes a $2 billion dividend to stockholders annually.
Earnings per share weighted at (15 billion – 2 billion) / 4 billion
Weighted EPS = 13 billion / 4 billion
Weighted EPS = 3.25
Read Also:SHAREHOLDER EQUITY: What It Is, Examples and How to Calculate It
In your capacity as an investor, it is essential to know how to interpret earnings per share (EPS) results because they have a massive effect on a company’s financial performance, performance, and worth. To analyze EPS results, consider the following:
A more significant payout results from a higher EPS.
A corporation with a higher EPS number is more lucrative and can pay out far more money to its shareholders. It’s important to remember that there is no set limit on how many company shares can be purchased or sold. It is advised to continually contrast a company’s EPS with similar businesses.
Should EPS be high or low?
EPS should be high and consistently so, for a successful investment.
The Importance of EPS in a Business
#1. To compare Businesses
By evaluating how a firm performs compared to others, reviewing the EPS of businesses in the same industry can aid you in making wiser investment decisions. When making financial selections, keep in mind additional considerations like:
- Cost per share
- Total number of dividends
- The worth of a company that trades on a stock exchange is called Market capitalization.
- Liquidy is the ability of a company’s assets to be converted into cash.
Trends in EPS growth can be used to predict future profitability.
An investment in a company with a rapidly increasing EPS is more reliable than one with a fluctuating or dropping EPS. You may track the company’s performance over the years to make wise investment selections by doing a per-share analysis of it. For instance, a business with consistent earnings per share (EPS) is more reliable than one with large EPS spikes and decreases.
#2. To Determine Stock Value
You can tell whether a company’s stock price is fair based on its price-earning ratio. For the price-earnings comparison, EPS provides the earnings data required. You may establish if a company is overpriced or appropriately valued compared to other businesses in its sector by dividing its share price by its earnings per share.
Here are some examples of EPS varieties you might come across:
Current EPS
Data from just the current year, including projections, are used to calculate current EPS. The four quarters of the current fiscal year’s data were used in this calculation. As of now, certain quarters have provided accurate data, while others are still only forecasts.
Trailing EPS
Focusing on data from the prior year is what trailing EPS does. This calculation uses revenue from the prior four quarters to determine earnings per share. Because it is based on actual data, trailing EPS is often used to value stocks. Since it doesn’t forecast future EPS values, investors might not utilize trailing EPS as regularly as other forms.
What is good earnings-per-share ratio?
The best odds of success are with stocks rated 80 or higher. But through stock buybacks that lower the number of outstanding shares, companies can enhance their EPS figures. Significant profit growth thus necessitates strong sales growth.
How do you calculate earnings per share?
EPS can be calculated in two ways: using either a standard earnings-per-share equation or a weighted earnings-per-share equation.
Divide the net revenue by the outstanding shares after finding out the company’s net revenue and its outstanding shares.
What is a bad EPS?
It is possible for a firm to have negative earnings per share if its income is negative. This indicates that the company is either losing money or spending more than it is generating at the moment.
Conclusion
Earnings per share refer to earnings accessible to each corporate equity share. Consequently, it is a condensed way of measuring the business’s profitability.
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