Earnings per share is a measure of a company’s profit. It shows the dollar value of earnings per each outstanding share of a company’s common stock.
The EPS figure gives investors an idea on the company’s performance and shows how much money a share of stock earned or lost as a result of selling goods and services.
Earnings per share is considered to be an important figure in determining a share’s price. Earning per share is one of the figures used in calculating a company’s P/E Ratio (price to earnings ratio) and is also often used by investors to compare the growth of a company’s earnings from year to year, as well as to forecast future growth of earnings.
Earnings per share is easy to calculate and can easily be found by looking at a company’s earnings reports (reported in the 10Q and 10K). The Securities and Exchange Commission (SEC) requires companies to report their EPS quarterly.
EPS and Wall Street
Earnings per share is one of the main numbers that is announced by publicly traded companies when they release their latest quarterly or yearly results.
For example when a company reports its latest quarterly results, the announcement from the company usually goes something like this: “Today we are announcing second quarter Net Income of $2 billion with an EPS of $1.20 per share, which is up 20% from the same quarter of last year.”
Many companies typically provide estimates of how much the company expects to earn for the quarter and also the current year. Wall Street analysts that follow the company will pay very close attention to this “guidance”. From that, analysts come up with their own EPS estimate model. When several different analysts do this for the same company, the average or “consensus” estimate is reported.
When a company reports its quarterly results, investors quickly look at the EPS. If the company “beats expectations,” that means the EPS happened to be above the consensus (average) prediction. If it “missed earnings,” that means the EPS was below the consensus. And, if they “met expectations,” the consensus and the actual EPS happened to be the same.
A company that can consistently beat or meet expectations will often be rewarded with analyst upgrades and a higher stock price. A company that misses expectations will often see its stock downgraded and the stock price drop in value.
Most stock-quote systems such as Google Finance, Yahoo Finance or online brokers will automatically display the earnings per share figure. For example if you go to Google Finance to get a quote on a stock you can find out the EPS number, which is automatically displayed.
How Earnings Per Share is Calculated – Formula
The basic formula for calculating earnings per share is by taking net income (earnings) for a certain period and dividing it by the number of common shares outstanding during the period.
Earnings per share (basic formula): Net income ÷ Common shares outstanding = EPS
Subtracting Preferred dividends:
Preferred stock rights have precedence over common stock. Therefore, dividends declared on preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative, the annual dividends are deducted whether they have been declared or not.
Therefore, earnings per share (EPS) is calculated by taking the net income and subtracting the preferred dividends, and then dividing that result by common shares outstanding.
Types of EPS Numbers
There are three types of EPS numbers:
- a trailing EPS (calculated using the previous year’s earnings)
- a current EPS (uses the current year), and
- forward EPS (a projection for the coming year).
Earnings Per Share Sample
XYZ has a current net income of $700,000 during the past year and pays out $60,000 in preferred dividends. The company has 180,000 common shares outstanding.
Solution: ( $700,000 − $60,000 ) / 180,000 = $3.55 earnings per share
