Understanding how to calculate earnings per share (EPS) is crucial for anyone interested in investing or analyzing the profitability of a company. EPS is a financial metric that gives you insight into how much profit a company generates for each outstanding share of its stock. In this guide, we’ll break down everything you need to know about earnings per share calculation.
What Is Earnings per Share?
Earnings per share, or EPS, is the portion of a company’s profit allocated to each outstanding share of common stock. Essentially, it tells you how much money a company makes for each share you own. Investors and analysts use this metric to gauge a company’s financial health and profitability.
EPS can be calculated using the formula:
EPS=Net Income-Preferred DividendsAverage Outstanding Sharestext{EPS} = frac{text{Net Income} – text{Preferred Dividends}}{text{Average Outstanding Shares}}
Why Is EPS Important?
EPS is one of the most commonly used indicators of a company’s profitability. The higher the EPS, the more profit a company is making on a per-share basis. This can be particularly useful when comparing the financial performance of different companies or tracking a company’s growth over time.
How to Calculate Earnings per Share
So, how do you calculate earnings per share? The process is simpler than it might seem. Here’s a step-by-step guide to help you calculate earnings per share effectively.
Step 1: Find the Net Income
The first step is to determine the company’s net income. Net income is the profit a company has earned after all expenses, taxes, and costs have been deducted. You can usually find this information on the company’s income statement.
Step 2: Subtract Preferred Dividends
If the company has preferred stock, you’ll need to subtract the dividends paid to preferred shareholders. Preferred dividends are paid out before common shareholders receive any profits, so they must be taken into account.
Step 3: Determine the Average Outstanding Shares
Next, you need to know the average number of outstanding shares for the period. This is the number of shares that have been issued and are currently held by investors. If the number of shares has changed during the year, you’ll need to calculate the average over the period.
Step 4: Plug the Numbers into the Formula
Once you have the net income, preferred dividends, and average outstanding shares, you can use the formula:
EPS=Net Income-Preferred DividendsAverage Outstanding Sharestext{EPS} = frac{text{Net Income} – text{Preferred Dividends}}{text{Average Outstanding Shares}}
For example, if a company has a net income of $1,000,000, paid $100,000 in preferred dividends, and has 500,000 outstanding shares, the EPS would be:
EPS=1,000,000-100,000500,000=900,000500,000=1.80text{EPS} = frac{1,000,000 – 100,000}{500,000} = frac{900,000}{500,000} = 1.80
This means the company earned $1.80 per share.
Types of EPS
There are two primary types of EPS calculations that investors look at:
Basic EPS
Basic EPS is the simplest form of the calculation. It only takes into account the company’s net income, preferred dividends, and outstanding shares.
Diluted EPS
Diluted EPS, on the other hand, includes the potential dilution of shares. This happens when a company has convertible securities, stock options, or warrants that could convert into additional shares. Diluted EPS gives you a more conservative figure by accounting for the possibility of more shares being issued in the future.
How to Calculate Profit Earned per Share
If you’re looking to calculate the profit earned per share, the process is essentially the same as calculating EPS. The profit earned per share is just another way to refer to EPS, since both metrics represent how much profit each share of stock has generated for the company.
Earnings per Share vs. Dividends per Share
It’s important not to confuse earnings per share with dividends per share (DPS). While EPS shows how much profit a company is making, DPS tells you how much of that profit is being returned to shareholders in the form of dividends.