What Is Earnings Per Share (EPS)?
Let me explain earnings per share (EPS) directly: it's a standard measure of a company's profitability, showing how much profit each outstanding share of common stock earns. You should know that a higher EPS generally means the company is seen as more profitable. We calculate it by dividing net income by the total number of outstanding shares.
Formula and Calculation
The formula for EPS is straightforward: take the net income, subtract any preferred dividends, and divide by the end-of-period common shares outstanding. For accuracy, use a weighted average of shares over the period, as share counts can change. If there are stock dividends or splits, adjust the calculation accordingly. Some sources simplify this by using the shares at the period's end, but I recommend the weighted approach for precision.
What Does Earnings Per Share (EPS) Indicate?
EPS tells you about a company's profitability on an absolute basis and is key in the price-to-earnings (P/E) ratio. Divide the share price by EPS, and you see what the market pays for each dollar of earnings. When picking stocks, combine EPS with other indicators. Remember, shareholders don't directly access these earnings, but comparing EPS to share price reveals investor sentiment on growth.
Example of EPS
Consider three companies: Company A with $7.6 billion net income, no preferred dividends, and 3.98 billion shares, giving $1.91 EPS. Company B: $18.23 billion income minus $1.61 billion dividends over 10.2 billion shares equals $1.63. Company C: $1.67 billion income, no dividends, 0.541 billion shares, resulting in $3.09. This shows how EPS varies based on income and shares.
Basic EPS vs. Diluted EPS
Basic EPS uses current outstanding shares, but diluted EPS factors in potential dilutions from options, warrants, or convertibles. For instance, if Company C had 23 million additional potential shares, its diluted EPS drops to $2.96. Adjust the numerator if needed, like adding back interest on convertible debt, to avoid distortion.
EPS Excluding Extraordinary Items
EPS can get skewed by one-off events, like selling a factory for a windfall or an unusual loss. Exclude these extraordinary items from net income in the formula to get a clearer picture. This way, you focus on repeatable profits, not anomalies.
EPS From Continuing Operations
If a company closes stores, calculate EPS from ongoing operations only. Say a firm starts with 500 stores, closes 100, and has $5 EPS overall; focusing on the remaining 400 might show higher EPS if closures eliminated losses. This helps you compare past and current performance accurately.
EPS and Capital
Don't overlook the capital needed to generate EPS. Two companies might have the same EPS, but the one using less capital is more efficient. Check return on equity (ROE) to identify this efficiency.
EPS and Dividends
Shareholders might get dividends from earnings, but not all EPS is distributed—some is retained. To access more, you'd need the board to adjust dividend policies.
EPS and P/E
Compare P/E ratios within industries; higher P/E often means investors expect growth. In bull markets, high P/E stocks tend to outperform.
What Is Rolling EPS
Rolling EPS blends past and future: combine EPS from the last two quarters with estimates for the next two, minus preferred dividends, divided by average shares. It's a compromise between historical trailing EPS and forward estimates, helping you gauge valuation without over-relying on guesses or past data.
FAQs
- What Is a Good Earnings Per Share Ratio? It depends on company performance, competitors, and analyst expectations; even growing EPS can disappoint if below forecasts.
- What Is the Difference Between Basic EPS and Diluted EPS? Basic uses current shares; diluted includes potential future shares from convertibles.
- What Is the Difference Between EPS and Adjusted EPS? Adjusted modifies net income to exclude non-recurring items for a normalized view.
- What Are Some Limitations of EPS? It can be manipulated by buybacks or accounting changes and ignores share price for valuation context.
The Bottom Line
EPS is a vital profitability metric tying stock price to earnings, but consider shares outstanding, dilution potential, and trends. Meeting or missing EPS expectations can swing share prices significantly.
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