Earnings per share (EPS) is calculated by determining the company’s net income and allocating it to each outstanding share of common stock.
- Earnings per share (EPS) is part of the company’s earnings allocated to one outstanding common stock.
- EPS (for companies holding preferred and common stock) = (net income-preferred dividend) ÷ average issued common stock
- EPS is also known as revenue— —The final statement about corporate value, both literally and figuratively.
Importance of Earnings Per Share (EPS)
EPS is an indicator that acts as a substitute for a company’s financial position. If all of the company’s profits are paid to shareholders, EPS is part of the company’s net profit allocated for each issued share.
EPS is typically used by analysts and traders to measure a company’s financial strength. This is often regarded as one of the most important variables in determining the value of a stock. Many investors still see EPS as a measure of a company’s profitability.In fact, it’s sometimes known as the bottom line— —The final statement about corporate value, both literally and figuratively.
High EPS means that the company is profitable enough to pay more money to its shareholders. For example, a company may increase dividends as revenue increases over time.
Investors typically compare the EPS of two companies in the same industry to see how they are performing better than their peers. Investors can also pay attention to EPS growth trends to better understand how well a company has made money in the past and gain a better view of the future. Companies with steadily increasing EPS are considered to be more reliable investments than companies with declining or significantly fluctuating EPS.
EPS is also an important variable in determining the value of a stock. This measurement is reflected in the earnings portion of the price-earnings ratio (P / E) valuation ratio. Price-earnings ratio is one of the most common ratios investors use to determine whether a company’s stock price is properly valued for its return.
Calculation of earnings per share
EPS is calculated as follows:
EPS = net income - preferred dividends / average outstanding common shares
As an example, assume the Bank of America (BAC) net income for fiscal year 2017. Its net profit was $ 18,232 million. Its preferred stock dividend was $ 1,614 million. Its average outstanding common stock was 10,196 million shares...This makes the EPS look like this:
Earnings = 18.232 billion - 1.614 billion = 16.618 billion (net profit)
EPS = 16.618 billion ÷ 10.196 billion = ~$1.63
Diluted EPS explaining the impact of convertible preferred stock, options, warrants, and other diluted securities was $ 1.56.....
Companies can choose to buy back their shares in the open market. In fact, Bank of America did this in 2017...By doing so, the company can improve EPS without actually improving net income (because of the low number of issued shares). In other words, net income will be split by fewer shares and EPS will increase.
To simplify the example, let’s say Bank of America repurchased 1 billion shares through its share buyback program in 2017. The EPS looks like this:
EPS = $16.618 billion (net income-preferred dividends) ÷ 9.196 billion (avg. outstanding shares) = ~1.81
In the above example, you can see that we are using the average number of shares issued in the formula. Averages are usually used because companies can issue or buy back shares throughout the year and it can be difficult to identify the true EPS. Since the number of shares can change frequently, you can use the average number of issued shares to get a more accurate picture of your company’s earnings.
However, not all companies have preferred stock. Some offer only common stock. The formula for calculating EPS is simply:
EPS = net income / average outstanding common shares
Explanation of earnings per share
There are actually three basic types of EPS numbers, based on the source of the data.
The company’s trailing EPS is based on previous year’s figures. The advantage is that you use the revenue from the last four quarters in your calculations and use real numbers instead of forecasts. Most price-earnings ratios are calculated using the trailing EPS, as they represent what actually happened and not what could happen. The numbers are accurate, but the subsequent EPS is “old news” and many investors also look at current and future EPS numbers. In the Bank of America example, we used the trailing EPS.
This measurement typically includes four quarters of the current fiscal year, some of which may have already passed and some of which may not yet have come. As a result, some data is based on real numbers and some data is based on forecasts.
Forward EPS is based on future figures. This measurement includes forecasts for a certain period in the future (usually the next four quarters). Future EPS estimates can be made by the analyst or the company itself. Although this number is based on estimates rather than actual data, investors are often very interested in forward EPS, as investments are generally based on estimates of a company’s future return potential. I have.
Investors often compare these different EPS calculations. For example, you might want to compare future EPS (which makes future forecasts) with the company’s actual EPS for the current quarter. If the actual EPS falls below the future EPS forecast, the stock price may fall. On the other hand, if the actual EPS is higher than expected, the stock price may rise.
EPS is especially useful when investors want to see past and future EPS figures for the same company, or when comparing EPS figures for companies within the same industry. For example, Bank of America belongs to the financial services sector.
As a result, investors need to compare Bank of America EPS with other equities in the financial services sector, such as JPMorgan Chase (JPM) and Wells Fargo (WFC). EPS is just one number, so it is imperative to use it in combination with other performance indicators before making an investment decision.