Definition of EPS ( Earnings per share )
- Earnings per share (EPS) - this is estimated by dividing a company's revenue by the number of outstanding shares of common stock. The resulting number is used to determine a company's profitability.
- It is typical for a company to announce earnings per share (EPS) that have been modified for unusual items and possible share dilution. The greater a company's EPS, the more successful it is thought to be.
Calculation of EPS
- Earnings per share is mostly calculated by dividing profit (also known as net revenue or earnings) by the number of available shares. A more precise calculation changes the numerator and denominator to account for shares generated by options, convertible debt, or warrants.
- As the numerator of the equation is modified for ongoing operations, it becomes more important. It is more reliable to use a weighted average number of common shares over the reporting period since the number of shares will change over time.
Interpretation of EPS
- Earnings per share is one of the most significant indicators used to determine a company's absolute profitability. It is also a key component in calculating the price-to-earnings (P/E) valuation ratio, where the E in P/E stands for earnings per share (EPS).
- An investor can understand the value of a stock by dividing its share price by its earnings per share. This metric shows how much the market is willing to pay for each dollar of earnings.
- EPS is one of the metrics that can be used to choose stocks. If you're interested in stock trading or investing, the next move is to find a broker that matches your investment style.
- Since ordinary shareholders do not have direct access to earnings, comparing EPS in absolute terms may be meaningless to investors. Rather, investors can equate EPS to the stock's share price to assess the value of earnings and how investors feel about potential growth.
Diluted EPS
- Basic EPS does not consider the dilutive effect of shares that the company can issue. When a company's capital structure incorporates things such as stock options, warrants, and restricted stock units (RSU).
- These investments, if exercised, have the potential to raise the total number of shares outstanding in the market.
- Companies also disclose diluted EPS, which means that all shares that may be outstanding have been sold, to further explain the impact of additional securities on per-share earnings.
- EPS is a profitability measure calculated by dividing the total profit by outstanding shares. It can be modified for ongoing operations and is widely used for stock valuation.
