What Is the Formula for Calculating Earnings per Share EPS?

equation for earnings per share

The number of common shares outstanding at the beginning of the period was 160 million. The earnings per share metric, often abbreviated as “EPS”, determines how much of a company’s accounting profit is attributable to each common share outstanding. 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.

equation for earnings per share

From that starting point, the diluted shares are determined by compiling a company’s potentially dilutive securities such as options, warrants, restricted stock units (RSUs), and convertible debt instruments. 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. 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.

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It’s the portion of a company’s net income that is allocated to each outstanding common share. Diluted EPS, which accounts for the impact of convertible preferred shares, options, warrants, and other dilutive securities, was $1.56. If BlueJay Skyscrapers Inc. has 5M shares of dilutive securities, add it to the 100M outstanding shares to equal 105M. Take the original numerator of $838M and divide it by the new denominator of 105M to get a diluted EPS of $7.98. A good EPS ratio is relative and depends on what the company plans on using the money for.

  • This could be anything from discontinued operations to extraordinary items, to the accounting effects of changes in foreign exchange rates.
  • If a company misses or beats analysts’ consensus expectations for EPS, their shares can either crash or rally, respectively.
  • Take the original numerator of $838M and divide it by the new denominator of 105M to get a diluted EPS of $7.98.

The better EPS results from the net income being divided up by a fewer number of shares. Earnings per share has different variations depending on the situation. Diluted EPS accounts for convertible securities, and adjusted EPS accounts for outlier variables. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. EPS also does not factor in the company’s outstanding debt, and if a company decides to settle the debt, the ratio could decrease drastically. Download CFI’s free earnings per share formula template to fill in your own numbers and calculate the EPS formula on your own.

Earnings Per Share (EPS)

To calculate earnings per share, subtract the net income ($840M) by the dividend payout ($2M) to get $838M. Take $838M and divide it by BlueJay’s weighted average shares of 100M to get an earnings per share of $8.38. Earnings per share (EPS) is a measure of a company’s profit per outstanding share of its common stock.

equation for earnings per share

EPS is the earnings available to each common shareholder in the company. The EPS is calculated as Net Income divided by the total outstanding common shares. Net Income is calculated after deducting the cost of goods sold, Selling and other general expenses, interest expenses, taxes, and other expenses from the revenue.

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The EPS is a measure of the profitability of the company and is an indicator of the operational health of the company. We now have the necessary inputs to calculate the basic EPS, so we’ll divide the net earnings for common equity by the weighted average shares outstanding. Since we now have the beginning and ending number of common shares outstanding, the next step is to calculate the weighted average shares outstanding.

The section will contain the EPS figures on a basic and diluted basis, as well as the share counts used to compute the EPS. Stock buybacks and new stock issuance are two methods for publicly-traded companies (post-IPO) to directly impact their number of outstanding shares. 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. An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation. A metric that can be used to identify more efficient companies is the return on equity (ROE).

What Is the Difference Between EPS and Adjusted EPS?

Another potential downside of using earnings per share is EPS tampering. It can decrease the number of outstanding shares, buy back stock, and inflate the earnings per share with the same level of earnings. Earnings per share, often shortened to EPS, is a profitability ratio that determines the net income earnings generated on each outstanding share of stock in a company at the end of a given year. One of the most common indicators for stock valuations is the PE ratio. It measures the number of dollars an investor pays to earn one dollar of earnings. Now, the PE ratio differs from one industry to another but is similar within the same industry.

Example of How to Calculate EPS

Between two companies in the same industry with the same number of shares outstanding, higher EPS indicates better profitability. EPS is typically used in conjunction with a company’s share price to determine whether it is relatively “cheap” (low P/E ratio) or “expensive” (high P/E ratio). The common shareholders may still not be paid any dividends even if the preferred shareholders are paid, even if the company is still left with some profit. The company may very well invest the same in new projects to enhance the future profits and the value of the company.