Earnings Per Share (EPS)

Earnings per share (EPS) is a figure describing a public company's profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company's quarterly or annual net income and separating by the number of its shares of stock outstanding. EPS is an essential measuring stick of a company's profitability and is used to tell investors whether the company is a safe bet.

Deeper definition

Earnings per share is one of the main variables for determining a company's share prices. A high EPS indicates that the company is more profitable and has more profits to distribute to shareholders.
Computing a company's fundamental EPS is simple. On the off chance that a company has 1,000 shares and earns $10,000, its earnings per share is $10/share. On the off chance that a company is paying dividends, they're subtracted from the net income or profit before calculation.
There's another approach to working out EPS called diluted earnings per share, which includes the value of convertible bonds and stock options assuming they were converted to stock in the number of outstanding shares. Calculations of diluted EPS factor in the effects of any action that causes more stock to be issued, however what actions are factored in varies depending on the accounting standard used.
Earnings per share is likewise major component in the price-to-earnings ratio calculation for esteeming a company, which measures a company's value as a factor of its current share price relative to its EPS.

Happy Trader Co. is a small company with no preferred shareholders, 10,000 outstanding common shares outstanding and a net income of $100,000 per year. That means its earnings per share is $10. All in the event that the company distributes its income to shareholders, each share receives $10. The company decides to sell some of its shares as preferred stock, which pay dividends. Presently the EPS lowers a little to reflect the amount they pay in dividends out of their net income.

Highlights

EPS indicates how much money a company makes for each share of its stock and is a widely used metric for estimating corporate value.
EPS can be arrived at in several forms, for example, excluding extraordinary items or discontinued operations, or on a diluted basis.
Earnings per share (EPS) is a company's net profit divided by the number of common shares it has outstanding.
Like other financial metrics, earnings per share is most valuable when compared against competitor metrics, companies of the same industry, or across a period of time.
A higher EPS indicates greater value because investors will pay more for a company's shares on the off chance that they think the company has higher profits relative to its share price.

FAQ

What Is the Difference Between EPS and Adjusted EPS?

Adjusted EPS is a type of EPS calculation where 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, in the event that the company's net income was increased based on a one-time sale of a building, the analyst could deduct the proceeds from that sale, thereby reducing net income. In that scenario, adjusted EPS would be lower than essential EPS.

What Is the Difference Between Basic EPS and Diluted EPS?

Analysts will sometimes recognize fundamental and diluted EPS. Fundamental 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 likewise the simplest definition of EPS.Diluted EPS, then again, will continuously be equal to or lower than fundamental EPS because it includes a more expansive definition of the company's shares outstanding. Specifically, it incorporates shares that are not currently outstanding yet could become outstanding assuming stock options and other convertible securities were to be exercised.

What Are Some Limitations of EPS?

When taking a gander at EPS to make an investment or trading decision, be aware of some possible disadvantages. For instance, a company can game its EPS by buying back stock, reducing the number of shares outstanding, and blowing up the EPS number given the same level of earnings. Changes to accounting policy for reporting earnings can likewise change EPS. EPS likewise does not take into account the price of the share, so it wants to sit quiet about whether a company's stock is over or undervalued.

How Do You Calculate EPS Using Excel?

After collecting the necessary data, input the net income, preferred dividends, and number of common shares outstanding into three adjacent cells, express B3 through B5. In cell B6, input the formula "=B3-B4" to take away preferred dividends from net income. In cell B7, input the formula "=B6/B5" to render the EPS ratio.

What Is a Good EPS?

What counts as a decent EPS will depend on factors like the recent performance of the company, the performance of its competitors, and the expectations of the analysts who follow the stock. Sometimes, a company could report developing EPS, however the stock could decline in price on the off chance that analysts were expecting an even higher number.Likewise, a contracting EPS figure could nonetheless lead to a price increase on the off chance that analysts were expecting an even worse result. It is important to continuously judge EPS in relation to the company's share price, like by taking a gander at the company's P/E or earnings yield.