Introduction to earnings per share (EPS)
EPS is known as a financial ratio that divides net earnings to common shareholders by the average outstanding shares over a period. The EPS formula intimates a company's ability to produce net profits for common shareholders.
Understanding Earnings Per Share (EPS)
A single EPS value for a company is somewhat arbitrary. The number is more relevant when analyzed against other companies in the industry and when compared to the company's share price. Between two companies in the same industry having the same number of shares outstanding, higher EPS means better profitability. EPS is typically used in association with a company's share price to determine whether it is comparatively "cheap" (low P/E ratio) or "expensive" (high P/E ratio).
Calculating EPS
There are many ways to calculate earnings per share. Below are two versions of the earnings per share formula:
EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding EPS = (Net Income – Preferred Dividends) / Weighted Average Shares Outstanding
The first formula utilizes total outstanding shares to calculate EPS, but analysts can use the weighted average shares outstanding when determining the denominator in practice. Since exceptional shares can vary over time, analysts often use last period shares outstanding.
Another kind of earnings per share formula is adjusted EPS. This eliminates all non-core profits and losses, as well as those in minority interests. This calculation intends to see only profit or loss produced by core operations on a normalized basis.
How Is EPS Used?
Earnings per share is the most critical metric employed in deciding a firm's profitability on an absolute basis. It is also a significant component used to calculate the price-to-earnings (P/E) valuation ratio, where the E in P/E is EPS. By dividing the company's share price by its earnings per share, the investor can understand the stock value regarding how much the market is ready to pay for each dollar of earnings. EPS is one of the indicators you could use to pick stocks. If you are interested in stock trading or investing, your subsequent step is to choose a broker that works for your investment style. Comparing EPS in absolute terms might not have much meaning to investors because regular shareholders do not directly access the earnings. Instead, investors will compare EPS with the stock's share price to discover the value of earnings and how investors feel about future growth.
