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Part of the Series How to Value a CompanyIntroduction to Company Valuation
Fundamental Analysis Basics
Fundamental Analysis Tools and Methods
Valuing Non-Public Companies
Earnings per share (EPS) is a measure of a company's profitability that indicates how much profit each outstanding share of common stock has earned. It's calculated by dividing the company's net income by the total number of outstanding shares.
The higher a company's EPS, the more profitable it is considered to be.
Earnings per share value is calculated as net income (also known as profits or earnings) divided by available shares. A more refined calculation adjusts the numerator and denominator for shares that could be created through options, convertible debt, or warrants. The numerator of the equation is also more relevant if it is adjusted for continuing operations.
Earnings per Share = Net Income − Preferred Dividends End-of-Period Common Shares Outstanding \text=\frac-\text< Preferred Dividends>>> Earnings per Share = End-of-Period Common Shares Outstanding Net Income − Preferred Dividends
To calculate a company's EPS, the balance sheet and income statement are used to find the period-end number of common shares, dividends paid on preferred stock (if any), and the net income or earnings. It is more accurate to use a weighted average number of common shares over the reporting term because the number of shares can change over time. Understanding how to find EPS is crucial for evaluating a company's profitability.
Any stock dividends or splits that occur must be reflected in the calculation of the weighted average number of shares outstanding. Some data sources simplify the calculation by using the number of shares outstanding at the end of a period.
Say that the calculation of EPS for three companies at the end of the fiscal year was as follows:
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Rolling EPS gives an annual earnings per share (EPS) estimate by combining EPS from the past two quarters with estimated EPS from the next two quarters.
It may be calculated with the following formula:
Rolling EPS = (Net income from the previous two quarters + next two quarters – preferred dividends) / average shares outstanding
Earnings per share (EPS), a company's profit divided by the amount of common stock it has in circulation, is one of the most closely observed metrics in investing. Other than serving as an indicator of how much money pulled in after accounting for all expenses was allotted to each share of common stock, it’s also frequently used to determine if a company is reasonably valued.
EPS is a key component of the price-to-earnings (P/E) valuation ratio. Divide the share price by EPS and you get a multiple denoting how much we pay for $1 of a company’s profit. In other words, if a company is currently trading at a P/E of 20x that would mean an investor is willing to pay $20 for $1 of current earnings.
The share price of a stock may look cheap, fairly valued or expensive, depending on whether you look at historical earnings or estimated future earnings.
Earnings forecasts are based on educated guesswork from analysts and are often too rosy, possibly making the valuation look cheap. Historical earnings, on the other hand, are set in stone but may not fairly represent a company's legitimate growth potential. Rolling EPS represents a compromise, giving investors a blend of both.
Rolling EPS shouldn’t be confused with trailing EPS, which mainly uses the previous four quarters of earnings in its calculation.
Sometimes you may hear or spot the term rolling trailing EPS, as well. What this means is that EPS will change as the most recent earnings are added to the calculation and earnings from five quarters ago are dropped to make way for them.
What counts as a good EPS will depend on factors such as the recent performance of the company, the performance of its competitors, and the expectations of the analysts who follow the stock. Sometimes, a company might report growing EPS, but the stock might decline in price if analysts were expecting an even higher number.
Likewise, a shrinking EPS figure might nonetheless lead to a price increase if analysts were expecting an even worse result. It is important to always judge EPS in relation to the company’s share price, such as by looking at the company’s P/E or earnings yield.
Analysts will sometimes distinguish between basic and diluted EPS. Basic EPS consists of the company’s net income divided by its outstanding shares. It is the figure most commonly reported in the financial media and is also the simplest definition of EPS.
Diluted EPS, on the other hand, will always be equal to or lower than basic EPS because it includes a more expansive definition of the company’s shares outstanding. Specifically, it incorporates shares that are not currently outstanding but could become outstanding if stock options and other convertible securities were to be exercised.
Adjusted EPS is a type of EPS calculation in which the analyst makes adjustments to the numerator. Typically, this consists of adding or removing components of net income that are deemed to be non-recurring.
For instance, if the company’s net income was increased based on a one-time sale of a building, the analyst might deduct the proceeds from that sale, thereby reducing net income. In that scenario, adjusted EPS would be lower than basic EPS.
When looking at EPS to make an investment or trading decision, be aware of some possible drawbacks. For instance, a company can game its EPS by buying back stock, reducing the number of shares outstanding, and inflating the EPS number given the same level of earnings.
Changes to accounting policy for reporting earnings can also change EPS. EPS also does not take into account the price of the share, so it has little to say about whether a company's stock is over or undervalued.
After collecting the necessary data, input the net income into Excel, preferred dividends, and number of common shares outstanding into three adjacent cells, say B3 through B5. In cell B6, input the formula "=B3-B4" to subtract preferred dividends from net income. In cell B7, input the formula "=B6/B5" to render the EPS ratio.
EPS is a financial metric used to measure a company's profitability on a per-share basis. It is calculated by dividing the company's net income (after taxes and preferred dividends) by the number of outstanding shares of common stock.
Earnings per share (EPS) is an important profitability measure used in relating a stock's price to a company's actual earnings. In general, higher EPS is better but one has to consider the number of shares outstanding, the potential for share dilution, and earnings trends over time. If a company misses or beats analysts' consensus expectations for EPS, its shares can either crash or rally, respectively.
